A.M. Best has affirmed the financial strength rating of A- (Excellent) and the long-term issuer credit rating of “a-” of Nova Casiopea Re S.A. (NCRe), based in Luxembourg. The outlook of these credit ratings is stable. The ratings reflect NCRe’s balance sheet strength, which A.M. Best categorised as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management. NCRe is a pure captive reinsurer of Telefónica, S.A. (Telefónica), a Spanish multinational broadband and telecommunications provider with operations in Europe, as well as North, Central and South America. NCRe began operations in 2017, replacing Casiopea Re S.A. (CRe) as Telefónica’s main reinsurance captive. “Concurrently, NCRe assumed the run-off liabilities of CRe. NCRe is dependent on Telefónica for its business; as such, while the company’s operations are diverse by line of business and geography, premium volumes remain constrained by Telefónica’s operations and strategic decisions,” according to A.M. Best. NCRe’s balance sheet strength assessment is underpinned by the strongest level of risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR). A.M. Best stated that the assessment is supported by NCRe’s conservative, appropriate and liquid investment portfolio, as well as capital buffers in the form of equalisation reserves. A partially offsetting factor is the company’s elevated exposure to natural catastrophe risk, which has the potential to introduce volatility to capitalisation levels. NCRe’s operating performance assessment reflects A.M. Best’s expectation that NCRe’s prospective earnings will mirror the track record of the captive’s predecessor (CRe), which generated healthy albeit fluctuating returns. A.M. Best explained that in 2019, NCRe generated a pre-tax profit of €10.4 million, with a higher loss ratio of 59.0 percent, compared to 41.7 percent (2018), with last year being impacted by two large claims related to Chile’s civil unrest and protests. As of year-end 2019, the captive’s combined ratio was 81.3 percent below CRe’s historic five-year weighted average of 85.4 percent (2012-2016). The announcement of Telefónica’s new business model in the fourth quarter of 2019 has not affected the captive’s performance. A.M. Best noted that potential spin-offs of Telefónica’s major businesses in Latin America will likely impact the captive’s risk exposure.
