AM Best has affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb+” (Good) of Compañía Reaseguradora del Ecuador S.A. (Ecua Re) (Ecuador). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect Ecua Re’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management (ERM).
The stable outlooks are derived from Ecua Re’s market position and its access to the primary insurance business in Ecuador amid growing business opportunities in the country.
Ecua Re was established in 1977 and is the only domestic reinsurer operating in Ecuador. The company provides reinsurance solutions for the country’s domestic insurers. Its business portfolio is mostly composed of property risks, mainly fire and auto, with a small component of casualty and life risks. The company likely will benefit from recent regulatory changes allowing primary insurers to cede personal lines that previously were restricted.
The company’s largest shareholder is Hannover Re, which has a 30% ownership stake via its wholly owned subsidiary, FUNIS GmbH & Co. KG; six local insurers hold 40% of the company. Ecuador’s economic prospects have improved in 2021 due to a favorable market perception of the new government; however, AM Best will continue to assess the impact of economic developments in the insurance market. Partially mitigating AM Best’s concern over the economic environment is that Ecua Re’s business profile benefits from its ownership, which provides access to quality business while at the same time maintaining reinsurance capacity through its main shareholder.
Ecua Re’s balance sheet strength is considered very strong, as risk-adjusted capitalization reflects the company’s ability to manage its risk exposures, supported by a comprehensive reinsurance program led by Hannover Re. Furthermore, the company gains financial flexibility through an Ecuador law that requires shareholders with a stake higher than 12% to assume additional financial responsibility in the event of insufficient shareholders’ funds. Partially mitigating factors are the company’s capital volume and the substantial amount of dividends paid in relation to net income in past years. ERM practices are considered appropriate given the company’s comprehensive and appropriate risk framework.
AM Best views the company’s operating performance as strong, given its consistent positive technical performance during the last five years. Additionally, its retrocession profile provides revenue from ceding commissions and mitigates claim costs, as experienced in the 2016 earthquake. As of August 2021, the company posted a return on premium of 15%.
Positive rating actions could take place if the company can increase its capital base in a stable manner while achieving the strongest level of risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR). Negative rating actions could take place if the company's business growth or available surplus limits AM Best's view of Ecua Re’s capitalization, through either an abrupt business increase without capital contributions or a decline in equity from the payment of dividends or negative results.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.
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