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FOR IMMEDIATE RELEASE
OLDWICK - AUGUST 29, 2018 03:57 PM (EDT)
A.M. Best has removed from under review with negative implications and downgraded the Financial Strength Rating to C (Weak) from C+ (Marginal) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “ccc+” from “b-” of Cooperativa de Seguros de Vida de Puerto Rico (COSVI) (San Juan, Puerto Rico). The outlook assigned to the FSR is stable, and the outlook assigned to the Long-Term ICR is negative.
The ratings reflect COSVI’s balance sheet strength, which A.M. Best categorizes as very weak, as well as its adequate operating performance, limited business profile and weak enterprise risk management.
The negative outlook assigned to the Long-Term ICR reflects A.M. Best’s concerns that COSVI’s risk-adjusted capitalization could further weaken or operating performance could deteriorate.
The balance sheet strength assessment is derived from COSVI’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio, which also is assessed at very weak. Puerto Rico experienced two devastating hurricanes in the fourth quarter of 2017, which compromised insurance operations on the island. COSVI, along with other Puerto Rico insurance companies, were permitted to delay the filing of its 2017 statutory financial statements until June 2018. However, COSVI required more time to complete its filing.
Furthermore, COSVI at year-end 2017 would have been required to have an additional $34 million of capital, based upon annual cash-flow testing and the depressed value of Puerto Rico bonds, which posted historic low prices after the 2017 hurricanes. In absence of a capital contribution, an additional reserve should have been booked at that time for the required $34 million. As of June 2018, the bonds had recovered a large part of their losses. COSVI also realized a portion of this recovery by selling $51 million of its Puerto Rico bond holdings. The recovery in the market value of the bonds, and the subsequent sale of a portion of the holdings, meant that the cash-flow shortfall that occurred at year-end 2017 no longer existed. COSVI has submitted a request to the Office of the Commissioner of Insurance of Puerto Rico to allow the company to recognize the increase in the value of the Puerto Rico bonds for cash-flow testing. The request was approved.
A.M. Best believes that although COSVI has stabilized its balance sheet, the company remains exposed to substantial investment risks. Business development in 2018 remains stagnant due to the prolonged economic depression in Puerto Rico over the last 12 years and the company’s limited access to external sources of capital. However, business renewal persistency has been more than adequate, and investment income has provided a sufficient hedge against underwriting fluctuations, even though the company’s business mix, whose expenses are mostly front-loaded, have resulted in unfavorable underwriting performance. Owing to the company’s operating structure and its connection to cooperatives and credit unions, the company’s operations are well-suited for stable development.
This press release relates to Credit Ratings that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and A.M. Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and A.M. Best Rating Action Press Releases.
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