The ratings reflect Colonnade's balance sheet strength, which AM 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 the explicit and implicit support provided by Fairfax. This support includes a track record of maintaining capital in the form of contributions and a legally binding guarantee, investment management services and ERM expertise. Fairfax's commitment to Colonnade's strong risk-adjusted capital position was evident in multiple capital contributions over its operating history. Colonnade's risk-adjusted capitalization has been reliant on support from Fairfax over the past few years. Going forward, AM Best expects that Colonnade will be able to support its business needs through organic capital generation, as it implements growth plans and continues to absorb start-up costs.
Colonnade's premium volume grew rapidly from 2016 through 2018, its first three years under Fairfax ownership, as a result of the rollover of books of business previously written by the operations of QBE Insurance Group Limited and American International Group, Inc. The risk associated with Colonnade's premium growth in its first few years of operation was moderated by Colonnade's high retention level of the management and staff that wrote the business under the former owners. The pace of growth moderated in 2019 and into 2020 and there is an expectation for more moderate growth going forward.
Colonnade's adequate operating performance has been driven by its favorable loss performance, which was offset by the initial costs incurred in its developmental stage with expenses outpacing premium. This performance was in line with the company's business plan and has steadily improved as start-up costs have subsided. Colonnade generated underwriting profit in 2019, but those underwriting profits have been lower in the first nine months of 2020, as the global pandemic affects premium growth and expenses remain somewhat constant, due to investments in technology to replace legacy systems. Results are in-line with the company's plans for this year.
The company's neutral business profile reflects its concentration in the Central and Eastern European region, with the three largest countries (Poland, Hungary and the Czech Republic) representing approximately 75% of the premium written. Concentration risk is offset by the dispersion of the remaining 25% of its business in three other central European countries, and Colonnade's diverse product offering.
AM Best considers the company's risk management capability to be in-line generally 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 and that continued into 2019 and 2020, which supports the ERM assessment of appropriate.