AM Best affirms ‘excellent’ ratings of Nova Casiopea Re

AM Best has affirmed the financial strength rating of A- (Excellent) and the long-term issuer credit rating of “a-” (Excellent) of Nova Casiopea Re (NCRe) (Luxembourg). The outlook of these credit ratings is stable.

The ratings reflect NCRe’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

NCRe operates as a single parent captive of Telefónica, a multinational broadband and telecommunications provider based in Spain with operations in Europe, as well as North, Central and South America. In 2017, NCRe took over Casiopea Re (CRe), the former captive of Telefónica, assumed its liabilities and mirrored its operations.

AM Best said that NCRe benefits from Telefonica’s geographic diversification across Europe and Latin America, adding that, NCRe maintains a broad portfolio mix, but as a pure captive its business profile remains constrained to Telefonica’s operations and strategic decisions.

NCRe’s balance sheet strength assessment is underpinned by the strongest level of risk-adjusted capitalisation, on both standard and catastrophe-stressed basis, as measured by Best’s capital adequacy ratio. This assessment is supported by NCRe’s “conservative and liquid” investment portfolio, AM Best said, as well as capital buffers in the form of equalisation reserves. An offsetting factor, AM Best added, is the company’s “elevated exposure” to natural catastrophe risk, which has the potential to introduce volatility to capitalisation levels.

“The adequate operating performance assessment reflects the captive’s good albeit fluctuating underwriting results since inception,” the rating agency said.

In 2021, NCRe generated a pre-tax profit of €11.3 million compared with €21.3 million in 2020, mainly driven the captive’s net technical results, which reported a higher loss ratio of 38.6% compared with 21.4% in 2020. The better net results in 2020 are mainly due to low frequency and low severity losses, AM Best noted. In 2021, the captive’s combined ratio was 72.0%, still below CRe’s historical five-year weighted average of 85.4% (2012-2016).

Recent changes to Telefónica’s business model have not materially affected the captive’s operations but, AM Best notes, potential spin-offs of Telefónica’s major businesses in Latin America will likely impact the captive’s risk exposure.

“In 2022, NCRe has continued to increase some of its net exposures in response to hardening reinsurance market conditions, reflecting the captive’s strategic importance to the group as a cost-effective risk management tool,” the rating agency concluded.