AM Best has downgraded the financial strength rating to ‘B’ (Fair) from ‘B+’ (Good) and the long-term issuer credit rating to ‘bb’ (Fair) from ‘bbb-’ (Good) of specialist facultative reinsurer Sun Re. The agency also places these ratings under review with negative implications following Sun Re’s request to withdraw from AM Best’s interactive rating process. The ratings reflect Sun Re’s balance sheet strength, which AM Best assesses as adequate, as well as its adequate operating performance, limited business profile, and marginal enterprise risk management (ERM). The rating downgrades reflect Sun Re’s weakened balance sheet strength, driven by challenges in sourcing investment alternatives to unrated affiliated counterparties as the company aims to derisk its investment portfolio. This resulted in concentrated allocations to unrated payment platforms in the second quarter of 2024, expected to remain until the company can transfer these funds into more traditional bank accounts. The ratings have been placed under review with negative implications to reflect pressures on the balance sheet strength and ERM assessments due to the execution risk associated with the restructuring of the company’s investment portfolio. The assessment also considers the company’s moderate dependence on retrocession, and its exposure to the high economic and moderate financial system and political risk in Saint Kitts and Nevis. Volatile technical results in recent years have adversely affected Sun Re's operating performance, primarily because of large contracts with high loss ratios linked to its legacy business. Unaudited results for 2023 indicate a return to technical profitability, as the company has focused on underwriting discipline and risk selection. As the company executes its business plan, prospective technical results remain vulnerable to volatility due to an evolving underwriting portfolio in terms of lines of business and risk locations. Sun Re’s net investment returns contribute modestly, albeit positively, to the company’s operating profitability.
