8 May 2019Analysis

Stanford Health Care captive ratings withdrawn following downgrade

Stanford Health Care has requested to withdraw the financial strength ratings of its Bermuda captive, SUMIT Insurance Company following a downgrade from AM Best.

AM Best had downgraded SUMIT’s financial strength rating from A (Excellent) to A- (Excellent), reflecting a material decline in surplus during the company’s fiscal-year 2018 due to significant adverse development on medical professional liability (MPL) claims as well as a dividend payment.

SUMIT’s reserves increased by 45 percent from the prior year while surplus declined by 33 percent, which increased underwriting leverage metrics. Commensurately, risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), declined significantly. SUMIT effectively retains $10 million per claim, which is high relative to surplus, and leaves the company exposed to increases in frequency and severity of claims.

AM Best added that SUMIT’s operating performance has been very volatile, with underwriting losses reported in four of the most recent five years, including a substantial loss in 2018.

However, AM Best noted that SUMIT serves an important strategic purpose as a captive insurance vehicle for Stanford Health Care and benefits from the robust financial strength of its ultimate parent, Stanford University.

The Excellent rating reflects the captive’s balance sheet strength, which AM Best categorises as “very strong”, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management.