A.M. Best Downgrades Ratings of Echelon Financial Holdings Inc., Affirms Ratings of Echelon Insurance and The Insurance Company of Prince Edward Island

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best has downgraded the issuer credit rating (ICR) to “bb” from “bb+” of Echelon Financial Holdings Inc. (EFH) [TSX: EFH]. The outlook for this rating remains negative. Concurrently, A.M. Best has affirmed the financial strength rating (FSR) of B++ (Good) and the ICR of “bbb+” of Echelon Insurance (Echelon), as well as the FSR of B++ (Good) and the ICR of “bbb” of The Insurance Company of Prince Edward Island (ICPEI) (Prince Edward Island, Canada). The outlook for each of these ratings is stable. All companies are domiciled in Mississauga, Ontario unless otherwise specified.

The ratings and outlooks for both Echelon and ICPEI are based upon each company’s solid risk-adjusted capitalization, sound operating earnings and low exposure to losses occurring from natural catastrophes given each company’s respective focus on non-standard and associated auto liability lines of business. The ratings also consider the benefits derived from the parent holding company, which is publicly traded on the Toronto Stock Exchange, affording potentially greater financial flexibility.

These positive rating factors are partially offset by Echelon’s concentration within Ontario’s auto market, with results adversely affected by accident claims frequency and cost inflation over the most recent five-year period, as well as strong competitive market pressures. Despite sound pre-tax operating earnings reported throughout the recent five-year period, policyholder surplus has declined given ongoing stockholder dividend payments to the parent for general use purposes, which has constrained the company’s ability to improve its capital base.

Offsetting factors for ICPEI include the impact of weather-related underwriting losses during three of the most recent five years. While premium volume is divided fairly evenly among Prince Edward Island, New Brunswick and Nova Scotia, ICPEI’s lack of scale reflects its relatively small geographic footprint which may increase its exposure to losses occurring from severe weather within the Atlantic Maritime provinces.

The ratings of EFH are based primarily on the overall financial strength of its operating insurance company, Echelon. In addition to Echelon, EFH is the parent of Qudos Insurance A/S (Qudos); a vehicle which writes non-standard auto and program business primarily in Ireland, the United Kingdom, and Denmark; CIM Reinsurance Company Ltd (Cim Re), a Barbados captive reinsurer; as well as CUISA Managing General Agency Corporation, a British Columbia specialty insurance agency. The downgrade of EFH’s ICR reflects the impact of recent strong premium growth written by both Qudos and Cim Re, which has somewhat impacted the organization’s overall financial strength. A.M. Best will continue to closely monitor the impact of strong premium growth reported by these companies on both operating performance and risk-adjusted capitalization across the enterprise, inclusive of EFH’s strategy and future of its international operations, including progress on the structured divestiture process announced in early 2016.

Positive rating actions could occur if the operating results for each company improve to a level that materially outperforms that of similarly rated carriers while maintaining a strong level of risk-adjusted capitalization through retained earnings.

Alternatively, negative rating actions could occur if operating results decline due to a weakening in underwriting performance. Negative rating actions may also occur should the risk-adjusted capitalization decline to a level that is not in line with AM Best’s expectations. For the operating subsidiaries, negative rating actions may also occur if the relationship to its parent changes in a manner that affects the operations of the companies.

This press release relates to rating(s) 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.

A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2016 by A.M. Best Rating Services, Inc. ALL RIGHTS RESERVED.

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A.M. Best

Gordon McLean, +1 908-439-2200, ext. 5304

Senior Financial Analyst

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Christopher Sharkey, +1 908-439-2200, ext. 5159

Manager, Public Relations

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Raymond Thomson, CPCU, ARe, ARM, +1 908-439-2200, ext. 5621

Senior Financial Analyst

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Jim Peavy, +1 908-439-2200, ext. 5644

Assistant Vice President, Public Relations

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Source: A.M. Best