Believing there is “uncertainty surrounding Cooperativa de Seguros de Vida de Puerto Rico’s ability to generate consistent and sustainable positive earnings from its core lines of business,” respected insurance industry monitor A.M. Best Co. has revised the company’s outlook to stable from positive and affirmed the financial strength rating of B- (Fair) and issuer credit rating of “bb-.”
COSVI, as the cooperative life insurance company is known, is owned by cooperative organizations in Puerto Rico and has been in business for 50 years.
“The revised outlook reflects COSVI’s negative statutory operating results in 2011, lower than expected risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio and high, albeit decreasing, exposure to common stocks, real-estate and mortgages relative to capital,” A.M. Best said in a release issued Wednesday.
However, the ratings agency also acknowledged that a number of initiatives that COSVI is implemented geared toward administrative efficiencies should stabilize operating results in the medium term.
“While improved, the balance sheet strength remains a challenge for COSVI due to leverage represented by borrowed money and a capital structure, which despite restructuring, retains a small amount of surplus notes,” A.M. Best said.
“Partially offsetting these negative rating factors are COSVI’s improved quality of capital, mostly due to a program that converts the high level of surplus notes to common equity, a decrease in investment risk due to changes in the company’s investment strategy and a well established presence in the cooperative and life insurance marketplace in Puerto Rico, where it offers a diversified product portfolio,” the company said.
During 2011, COSVI was able to convert almost 70 percent of its interest bearing surplus notes to common stock capital. A.M. Best expects the remaining scheduled conversion to be completed in the near future. In addition, COSVI has the commitment of its members to support the entity’s financial flexibility.
Key rating factors that could result in a positive rating action include a measurable track record of sustained profitability, growth in risk-adjusted and absolute capital, reduced volatility in operating results and continued reduction in COSVI’s investment margin balances.
On the other hand, A.M. Best noted that key rating factors that could result in a negative rating action include further deterioration of COSVI’s operating results, erosion in capital or changes to investment strategy that result in increases in margin investing or additional investment losses.