A Bermuda captive insurance company owned by Saudi Arabian Oil Company has earned a rating upgrade by a credit rating agency after performing excellently across key metrics.

AM Best expects a continuation of that performance even with some possible volatility for the captive.

Stellar Insurance Ltd has reported strong operating results over the past five years, mainly driven by robust underwriting profits in the absence of large losses, evident by a superior five-year (2018-2022) weighted average combined ratio of 20.7 per cent.

AM Best expects performance in 2023 and prospectively to remain strong, albeit subject to potential volatility owing to the captive’s exposure to high severity, low frequency losses in its energy programme.

Stellar’s business profile assessment reflects the key role it plays in SAOC’s overall risk management framework.

As a single-parent captive, Stellar’s purpose is to provide transfer solutions for risks emanating from SAOC and its affiliates’ operations.

The insurer’s portfolio has a majority of premiums represented by energy onshore and offshore property risks, with approximately 92 per cent of premiums associated with risks located in Saudi Arabia.

AM Best upgraded Stellar’s long-term issuer credit rating to “a+” (Excellent) from “a” (Excellent) and the financial strength rating was affirmed at A (Excellent). The outlook of these credit ratings is stable.

They reflect Stellar’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.

The rating actions reflect the company’s strengthening balance sheet fundamentals, supported by a consistently strong operating performance and the improved credit quality of its parent company.

Stellar’s balance-sheet strength is underpinned by its risk-adjusted capitalisation at the strongest level, as measured by Best’s capital adequacy ratio.

AM Best said it expects Stellar’s risk-adjusted capitalisation to remain at the strongest level, supported by its low underwriting leverage, full earnings retention and a comprehensive reinsurance programme.

The agency said Stellar’s capital base has grown steadily over time, with earnings being retained fully since the company’s incorporation in 2001. This has enabled the company to increase its underwriting capacity gradually.

Stellar’s capital requirements within the BCAR model are driven largely by investment risk and catastrophe risk. Investment risks stem from the company’s large fixed-income and mutual fund holdings, while catastrophe risk is driven by the company’s large per risk underwriting exposure.

AM Best said an offsetting balance sheet strength factor is the captive’s reliance on reinsurance to provide high gross underwriting limits. The credit risk associated with reinsurance is mitigated partially by Stellar’s use of a diversified panel of financially strong reinsurers.