The outlook of these Credit Ratings (ratings) is stable. The existing ratings of Fairfax and its other subsidiaries are unchanged.
The ratings reflect Colonnade's balance sheet strength, which A.M. Best categorizes as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).
Colonnade's balance sheet strength benefits from explicit and implicit support provided by Fairfax. This support includes a track record of capital maintenance in the form of capital contributions and a legally binding guarantee, investment management services, ERM expertise and technical reserving support. A.M. Best expects Colonnade's risk-adjusted capitalization to remain reliant on support from Fairfax over the next few years as it implements growth plans and absorbs startup costs. Fairfax's commitment to Colonnade's strong risk-adjusted capital position was evident in capital contributions over the past two years, as well as the additional contributions planned in fourth quarter 2018 and 2019, which includes the payment of Colonnade's unpaid share capital balance. Colonnade's premium volume has grown rapidly since 2016, accelerating in 2017, as a result of the rollover of books of business previously written by the operations of QBE Insurance (Europe) Limited and American International Group, Inc. The risk associated with Colonnade's premium growth is moderated by Colonnade's high retention level of the management and staff that wrote the business under the former owners.
Colonnade's adequate operating performance is driven by its favorable loss performance, which is offset by the initial costs incurred in its developmental stage with expenses outpacing premium. This performance is in line with the company's business plan and is expected to improve as the start-up costs subside. The company's neutral business profile reflects its concentration in the Central and Eastern European region, with the two largest countries (Poland and Hungary) representing about 50% of the premium written. Concentration risk is offset somewhat by the dispersion of the remaining 50% of its business in four other central European countries, and the product offering, with personal and commercial business representing 40% and 60% respectively.
A.M. Best considers the company's risk management capability to be generally in-line with its risk profile, which is supported by its focus on maintaining geographic and by line diversity of its business, conservative reserving and per risk reinsurance limits. In 2018, the company reduced its 1-in-500 years all perils probable maximum loss, which supported the improvement in the ERM assessment to appropriate. The company has also enhanced its internal ERM capabilities, with less reliance on parental support in this area.
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