AM Best has assigned a Financial Strength Rating of A (Excellent) and a Long-Term Issuer Credit Rating of "a" to Paramount Insurance, Inc. (Paramount) (Honolulu, HI). Paramount is a pure captive insurance company, wholly owned by Webcor L.P. (Webcor). Webcor is a full service general contractor that is ultimately owned by Obayashi Corporation (Obayashi) (OTCMKTS: OBYCF). The outlook assigned to these Credit Ratings (ratings) is stable.
The ratings reflect Paramount’s balance sheet strength, which AM Best categorizes as strong, as well as its strong operating performance, limited business profile and appropriate enterprise risk management (ERM). The company also receives inherent benefits of its captive structure in financial support and flexibility from its parents, Webcor and Obayashi. Obayashi, founded in 1892, is one of Japan’s largest building and civil engineering works groups and acquired Webcor in 2007.
Paramount’s balance sheet strength assessment of strong reflects the strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), with relatively modest surplus approximating $20 million. The company’s surplus growth is tempered by dividends paid to the parent, which totaled $31 million from 2017-2020. Partially offsetting Paramount’s strongest BCAR scores is the retention on its subcontractor default insurance (SDI) program, which is large relative to surplus. Management is increasing its reserves to cover multiple full SDI claims.
The company’s operating performance reflects its inherent benefits as a captive insurance company. Paramount’s strong operating performance takes into account actuarially determined rates charged to its parent, which lends itself to capital preservation as opposed to profit maximization. It also has minimal acquisition costs and administrative expenses, driving its very favorable expense ratio.
Paramount’s business profile is limited, as it covers workers’ compensation, general liability and Subguard (subcontractor default) exposures for only its parent, Webcor. In 2016, it restructured its direct write coverage, and as a result, all of its policies are now deductible reimbursement policies, protecting the capital base for unexpected losses in the captive. Paramount maintains an ERM structure that one would expect from a company of its size and sophistication. As a captive of Webcor and ultimately Obayashi, Paramount benefits from, and is an integral part of, the parent’s ERM framework with oversight by the board of directors composed of majority membership by Obayashi executives.
Paramount’s ratings receive lift from its ultimate parent, Obayashi, reflecting its strategic importance and strong link to Webcor, one of Obayashi’s key North American construction subsidiaries. Obayashi’s conservative financial position and strong operating metrics enable it to provide significant financial flexibility to Paramount in support of Webcor, should it become necessary.
Positive rating action could occur in the medium term if the company is able to grow surplus and improve its risk-based capitalization in support of its larger exposures in the SDI and contractor-controlled insurance programs. Negative rating action could occur if Paramount’s underwriting performance weakens or demonstrates volatility, negatively impacting earnings and risk-adjusted capitalization over time, or if there is a material shift in risk profile that could potentially undermine the stability and profitability of the company. Negative rating action also could occur if the ultimate parent’s financial profile materially deteriorates and affects AM Best’s view of its ability and willingness to support its captive.
AM Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated in the United States and throughout the world. For current Best’s Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.
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