A.M. Best has assigned a Financial Strength Rating of A- (Excellent) and a Long-Term Issuer Credit Rating of “a-” to Santa Lucía S.A. Compañía de Seguros y Reaseguros (Santa Lucia) (Spain), the operating holding company of the Santa Lucia group. The outlook assigned to these Credit Ratings (ratings) is stable.

The ratings reflect Santa Lucia’s excellent risk-adjusted capitalisation, good operating performance and established business profile in Spain. Offsetting rating factors are the company’s concentrated underwriting portfolio, by product offering and geographical exposure, its deteriorating technical performance and the execution risk associated with its expansion.

Santa Lucia maintains excellent risk-adjusted capitalisation, supported by strong earnings generation. The group’s balance sheet strength is protected against the occurrence of certain major losses, due to the benefit of the national government’s scheme (Consorcio de Compensación de Seguros) for catastrophic perils that absorbs losses arising from various catastrophic events. As a result, Santa Lucia’s utilisation of reinsurance is limited, despite potential catastrophic exposure to pandemics through its decesos (funeral expenses) and life portfolios, and certain weather-related events.

Santa Lucia’s balance sheet strength is supported by its evolving enterprise risk management framework. However, some shortcomings have been highlighted, including the group’s reliance on its high capital levels to support a higher appetite for certain risks. In particular, Santa Lucia’s investment strategy exposes the company to riskier asset classes, which increases the volatility of the group’s risk-adjusted capitalisation.

In line with the rest of the market in Spain, the company has increased its reserves for certain legacy lines within its funeral expenses portfolio after changes in regulation affected its reserving approach. These higher reserving requirements will continue to affect the profitability levels for this business class. Reserves also have been strengthened for the life account in response to the prolonged low interest rate environment.

Santa Lucia’s operating performance is good but has deteriorated, driven by the weaker technical experience of its non-life and life operations. This partially reflects the strengthening of reserve provisions, in addition to the impact of softening market conditions. In particular, the company’s life portfolio reported an underwriting loss in 2015, driven by an increase in reserve provisions for life policies that have investment return guarantees. Nonetheless, the company has produced an average combined ratio of 92.9% over the past five years. The non-life portfolio accounts for approximately 80% of gross written premium (GWP).

Santa Lucia has an established business profile as a provider of personal insurance product lines in Spain. The group’s core line of business is funeral expenses (representing approximately 50% of GWP in 2015), in which it enjoys a leading market position partly due its long-standing brand and reputation in the sector, as well as the benefit of a wide and exclusive agency network. Other prominent classes of business are household and life insurance, which combined represent approximately 40% of premium volumes. The group continues to diversify its business profile by expanding into other classes of business, organically and through partnerships.

This press release relates to Credit Ratings that have been published on A.M. 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 A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings.

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