AM Best has upgraded the credit ratings of Austral Resseguradora S.A. (Austral Re) and Austral Seguradora S.A. Concurrently, and revised their outlooks to stable from positive.
The credit rating agency has assigned the companies a Financial Strength Rating A- (Excellent), upgraded from B++ (Good); and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” (Excellent), upgraded from “bbb+” (Good).
It also affirmed the Long-Term ICR of “bb+” (Fair) of Austral Participações S.A. All companies are domiciled in Brazil, and collectively are referred to as Austral.
According to AM Best, the ratings reflect Austral’s balance sheet strength, which the agency assesses as strongest, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.
“The stable outlooks are underpinned by AM Best’s expectation that Austral’s balance sheet strength will remain at the strongest level, supported by internal capital generation, the recent reduction of its catastrophe exposures and continued improvement and stabilisation of its operating performance, as its exposure to climate-related catastrophe reinsurance was reduced significantly,” the agency noted.
Adding: “These lines generated volatility for Austral’s operations in 2019 and 2020. In 2021, the group demonstrated the initial benefits of its business portfolio adjustments.
“As of 2022, Austral continues to show a solid capital structure as shown in its risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), assessed at the strongest level coupled with positive bottom line and technical results for each of its subsidiaries.”
Additionally, AM Best highlighted, the company maintains a retrocession program with highly rated counterparties as it remains dependent on reinsurance to provide additional market capacity.
On the group’s investment portfolio, AM Best said it expects that Brazil’s double-digit interest rate environment will continue to increase the contribution of Austral’s investment income to its operating results, compared with recent years, potentially helping surplus growth.
According to the announcement, AM Best recognizes that, while a high interest rate environment can be seen generally as positive, the high market reference rates are a consequence of an inflationary economy, which in turn contributed to the reduction of inflationary pressures at year-end 2022 without affecting the group’s performance.
Partially offsetting these positive rating factors, the rating agency noted, is Brazil’s highly competitive re/insurance market as homegrown and global re/insurers compete for market share. In addition, Austral must continue to weather the still significant macroeconomic challenges over the short and medium term.
“Negative rating actions could occur if the group’s operating performance decays compared with the projections presented to AM Best. Negative rating actions also may occur if the group’s risk-adjusted capitalization experiences an adverse impact from the recent portfolio changes or other issues,” AM Best concluded.
“The upgrade of Austral’s ratings by AM Best is a testament to the quality of our operations and our underwriting team.
“The company has heavily invested in improving its pricing and risk governance processes, which we believe is being recognized, along with other investments we have made, in this positive review of our rating by the agency,” the CEOs of Austral Seguradora and Austral Re, respectively, Carlos Frederico Ferreira and Bruno Freire, commented.
