Standard & Poor's Ratings Services lowered its counterparty credit and financial strength ratings on Oil Casualty Insurance Ltd. (OCIL) to "Triple-B-plus" from "A-minus." The New York-based ratings service added that the outlook is stable.
OCIL is a mutual insurance company set up to provide oil companies, especially those with drilling rigs and platforms in the Gulf of Mexico, with coverage.
"The rating action reflects our concern about OCIL's business model, which relies highly on reinsurance and focuses on a single line of business within a relatively narrow industry sector," explained Laline Carvalho, S&P credit analyst, in a statement. "In addition, we believe OCIL's policy limits are relatively high in view of its relatively small net premium base and annual earnings power, and the high excess nature of the policies it offers inherently exposes OCIL to significant volatility in its balance sheet and income statement."
These factors--combined with a relatively high historical proportion of equities on OCIL's balance sheet--have led the company to experience significant volatility in its operating results on a year-to-year basis, which is higher than that of most "A-minus" rated insurers, S&P said.
The company's operating performance over the last seven years has been poor, S&P continued, with a weighted average return on revenue of negative 5 percent from 2000 through 2005, and a large loss incurred during the 2006 calendar year that is expected to lead the company to report a net loss for the year.
S&P continued that OCIL's new senior management team is taking the initiative to expand the company's market niche and lower OCIL's potential volatility by increasing attachment points and decreasing limits as well as reducing its exposure to equities. However, the management has not been at OCIL long enough to establish a successful track record. The company and its strategic plan are still at different levels of development and implementation stages.
Partially offsetting these concerns are OCIL's good competitive position within its chosen niche, strong capital adequacy and strong reinsurance protection, which is expected to be in place through June 2008.
Over the medium term, OCIL's operating results are expected to remain volatile given the low-frequency/high-severity nature of its exposures. Through June 2008, however, underwriting volatility is expected to be significantly curtailed by the strong reinsurance protection currently provided by the Avalon Re Ltd. facility. Capital adequacy is expected to remain in the strong range, according to S&P.
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