AM Best downgrades Sun Re Ltd’s financial strength amid balance sheet challenges

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Credit rating agency AM Best has downgraded the financial strength rating of reinsurer Sun Re L from B+ (Good) to B (Fair) and lowered its Long-Term Issuer Credit Rating from “bbb-” (Good) to “bb” (Fair).

am-best-logoThese Credit Ratings are now under review with negative implications following Sun Re’s request to withdraw from AM Best’s interactive rating process.

The downgrade in ratings stems from Sun Re’s weakened balance sheet strength, driven by challenges in diversifying investments away from unrated affiliated counterparties as part of its derisking strategy.

This has resulted in concentrated allocations in unrated payment platforms through the second quarter of 2024, expected to persist until funds can be moved to more traditional bank accounts.

These developments have negative implications for the ratings, reflecting pressures on balance sheet strength and ERM assessments due to the execution risks associated with restructuring the investment portfolio.

Sun Re’s balance sheet strength is evaluated based on its risk-adjusted capitalisation, measured by the Best’s Capital Adequacy Ratio (BCAR), which is expected to remain robust by year-end 2023 despite increased investment charges related to significant concentration and credit risks associated with affiliated assets at the time.

The assessment also considers Sun Re’s moderate reliance on retrocession and exposure to economic and financial system risks in Saint Kitts and Nevis.

Regarding operating performance, Sun Re has faced volatility in technical results over recent years, with a five-year average combined ratio of 108.6% (2018-2022), primarily due to high loss ratios from large contracts in legacy business.

Unaudited 2023 results show a return to technical profitability driven by improved underwriting discipline and risk management efforts.

However, future performance remains subject to volatility due to ongoing adjustments in underwriting strategies and risk exposures across different business segments and geographical areas. Net investment returns continue to contribute modestly and positively to operating profitability.

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