26 November 2018Analysis

CNOOC captive gets Excellent rating

Ratings agency AM Best has affirmed the financial strength rating of A- (Excellent) of ICM Assurance (ICMA), the Barbados-based single parent captive of China National Offshore Oil Corporation (CNOOC).

The outlook of the captive is stable, and the ratings reflect IMCA’s balance sheet strength, which AM Best categorises as strongest, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

ICMA’s balance sheet strength is underpinned by its risk-adjusted capitalization being at the strongest level, as measured by Best Capital Adequacy Ratio (BCAR), generally favorable trend of earnings, good liquidity and low underwriting leverage.

An offsetting element to the balance sheet strength assessment is ICMA’s high gross loss potential due to the nature of the insurance provided for oil and gas exploration, which is subject to high severity losses, along with its significant dependence on reinsurance.

“This is tempered partially by the extensive loss control and group-wide safety programs provided by its ultimate parent, which help mitigate losses arising from its parent’s ordinary course of business,” said AM Best.

“Extensive reinsurance protection, placed with a panel of financially strong reinsurers, limits ICMA’s net exposure to shock loss events. Also noteworthy is the significant percentage of assets that ICMA has loaned to its parent. These investments are very liquid and repayable on demand so there is limited counterparty risk due to the affiliation of the two companies.”

The captive has generally reported adequate operating results, with favourable operating performance in the past five years, although underwriting results are volatile and susceptible to occasional outsized losses. This was evident in 2016 when underwriting losses eroded the company’s capital and surplus by USD 21 million or 5 percent, AM Best noted.

ICMA’s loss experience has remained favorable due in part to no material catastrophe events, its inherent knowledge of the business written and the strong loss control programs adopted at the parent level. The risk management team conducts periodic reviews of ICMA’s potential loss exposures through an industrial risks specialist.

AM Best’s business profile assessment of ICMA considers its fundamental role as a single-parent captive and the implied support provided by its ultimate parent, whose management incorporates ICMA as a core element of CNOOC’s overall risk management safety and risk mitigation programs.

The ratings agency adds that despite its diversified business platform, sustaining a trend of stable earnings is a challenge for ICMA due to the nature of the business it writes.