SILAC outlook downgraded due to decline in reinsurance quality

Utah-based SILAC Insurance Company (SILAC) has had its outlook adjusted from stable to negative by AM Best.

The shift to a negative outlook is primarily due to a decline in the quality of SILAC’s reinsurance counterparties and a decrease in risk-adjusted capital, as measured by Best’s Capital Adequacy Ratio (BCAR). This is attributed to increased reinsurance leverage following several agreements with unrated reinsurers and a strategy of maintaining high reinsurance leverage to manage capital strain.

Despite this change, AM Best has affirmed SILAC’s Financial Strength Rating at B+ (Good) and its Long-Term Issuer Credit Rating at “bbb-” (Good). The ratings reflect SILAC’s adequate balance sheet strength and operating performance, along with its neutral business profile and marginal enterprise risk management (ERM).

Although SILAC’s capital and surplus have grown over the past year, bolstered by retained earnings and investor capital contributions, its risk-adjusted capitalization remains weak. AM Best has also expressed concerns regarding SILAC’s limited financial flexibility for potential capital requirements to support new growth or offset investment impairments or recapture of ceded business.

SILAC has maintained a favorable operating performance, reporting net income of $41 million as of the third quarter of 2023. The company’s earnings are largely derived from investment spreads on its fixed-indexed annuity (FIA) products.

SILAC’s strategy of reducing sales to manage capital levels has also not significantly impacted its strong earnings. The company’s business profile is supported by its position in annuity sales and geographic diversification, offering a range of FIA and multiyear guaranteed annuity products.

The assessment of SILAC’s ERM is influenced by the deteriorating quality of its reinsurance relationships and a heavy dependence on reinsurance to manage capital strain. While SILAC has identified key risk categories and established risk appetite and tolerance levels for each, its reliance on reinsurance remains a concern. AM Best will continue to monitor SILAC’s efforts to develop and enhance its ERM program.

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