AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” (Excellent) of Nova Casiopea Re S.A. (NCRe) (Luxembourg). The outlook of these Credit Ratings (ratings) is stable.

The ratings reflect NCRe’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

NCRe operates as a single parent captive of Telefónica, S.A. (Telefónica), a multinational broadband and telecommunications provider based in Spain with operations in Europe, as well as in North, Central and South Americas. NCRe benefits from Telefónica’s geographic diversification across Europe and Latin America. NCRe maintains a broad portfolio mix, but as a pure captive its business profile remains constrained to Telefónica’s operations and strategic decisions.

NCRe’s balance sheet strength assessment is underpinned by the strongest level of risk-adjusted capitalisation, on both a standard and catastrophe-stressed basis, as measured by Best’s Capital Adequacy Ratio (BCAR). This assessment is supported by NCRe’s conservative and liquid investment portfolio, as well as capital buffers in the form of equalisation reserves. An offsetting factor is the company’s elevated exposure to natural catastrophe risk, which has the potential to introduce volatility to capitalisation levels.

The adequate operating performance assessment reflects the captive’s good, albeit fluctuating underwriting results since inception. In 2022, NCRe generated a pre-tax profit of EUR 5.9 million compared with EUR 12.4 million in 2021. The reduction was driven by a year-on-year increase in the loss ratio to 69.7% in 2022, from 38.6% in 2021, as a result of incurred severity claims. Overall, in 2022, NCRe’s combined ratio stood at 89.4%, well above its five-year weighted average combined ratio of 70.4% (2018-2022).

Recent changes to Telefónica’s business model have not materially impacted the captive’s operations. However, AM Best notes that potential spin-offs of Telefónica’s major businesses in Latin America will likely impact the captive’s profile, reducing its natural catastrophe exposure, among other impacts. In 2023, NCRe restructured its reinsurance programmes and further increased some of its net exposures in response to hardening reinsurance market conditions, reflecting the captive’s strategic importance to the group as a cost-effective risk management tool.

AM Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated throughout the world. For current Best’s Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.

This press release relates to Credit Ratings that have been published on AM 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 AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

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