A.M. Best confirms ‘ongoing concerns’ over COSVI’s capital strength
A.M. Best has kept its negative outlook about Cooperativa de Seguros de Vida de Puerto Rico’s staying power and efficiency, by upholding its Financial Strength Rating of C+ (Marginal) and the Long-Term Issuer Credit Rating of “b-” remain unchanged.
In a statement, A.M. Best stated that ongoing concerns over the future of COSVI’s (as the company is known for its initials in Spanish) capital strength and operating efficiency.
COSVI’s Credit Ratings were placed under review with negative implications on April 4, 2018, over concerns about the company’s exposure to Puerto Rico bonds and the volatility that represented to its absolute or risk-adjusted capital at year-end 2017.
At that time, A.M. Best indicated the ratings would remain under review until it received COSVI’s 2017 annual statement and conducted conversations with the company’s management team regarding the results contained in the filing.
“Since that last rating action, COSVI has submitted its 2017 statutory annual and first-quarter 2018 statements. However, the company revised the cash flow testing results for year-end 2017,” A.M. Best noted.
As indicated in COSVI’s year-end statutory statement, the depressed market value of Puerto Rico securities at Dec. 31, 2017 would require the company to post additional reserves under the cash flow testing analysis, as its invested asset values and returns on investment would not be able to satisfy the guarantees on the Segregated Asset Plan (SAP) annuity block of business.
“At this point, the company is working with the Office of the Commissioner of Insurance of Puerto Rico to satisfy and execute initiatives discussed over the past few months,” A.M. Best confirmed.
Due to the drastic decline in market value of Puerto Rico-domiciled bonds at year-end 2017, and the subsequent recovery of the value of these domestic securities through May 2018, COSVI petitioned the commissioner’s office to make an allowance and recognize the increased value of Puerto Rico bond obligations.
Concurrently, COSVI has sold two large tranches of these bonds in 2018 at a reduced cost, eliminating a large unrealized loss that caused the unfavorable outcomes from the cash flow test, while recognizing a substantially smaller realized loss.
Consequently, the sale of the at-risk securities rendered the cause of the unfavorable cash flow testing inapplicable.
“As the company works through the many initiatives, A.M. Best remains concerned that some of the various alternatives chosen may have further adverse effects on COSVI’s capital strength and operating efficiency,” the ratings agency said.
“A.M. Best will continue to monitor the developments at COSVI closely and will need to review the final cash flow testing results and audit opinion to determine if there is an impending need for negative rating action going forward in the near-to-medium term,” it concluded.