A.M. Best has revised the outlook to positive from stable and
affirmed the financial strength rating of B++ (Good) and the issuer
credit ratings of "bbb+" of R.V.I. Guaranty Co., Ltd. (RVI
Guaranty) (Bermuda) and its Connecticut-domiciled subsidiary, R.V.I.
America Insurance Company (RVI America) (collectively known as RVI).
RVI is one of the largest insurance companies that specialize in
underwriting and marketing of residual value insurance for clients
engaged in asset-based financing. Coverage is purchased by participants
in asset-based finance transactions to obtain third-party financial
support either due to regulatory and accounting issues or for protection
against the unexpected decline in the market value of an asset.
The ratings reflect RVI's operating and underwriting results,
conservative investment portfolio and improvement in the market value of
its insured assets, business profile and risk-adjusted capital. After a
2008 downturn in the economy that resulted in a significant decline in
(1) the market values of its insured assets, (2) operating results and
(3) demand for RVI's primary insurance product, residual value
insurance, the company took actions to stabilize and improve operating
results and expand its narrow focused/concentrated client base. These
specific actions included: the de-risking of its insured portfolio
through the commutation of (1) passenger vehicle policies and/or pools
of policies of higher risk assets and (2) RVI's entire $4.2 billion
financial guaranty reinsurance portfolio. The development of additional
passenger vehicle programs that will expand the use of residual value
insurance beyond vehicle leases into vehicle financings; the growt of
its fee-based services, which not only directly contributes to RVI's
profitability but also provides opportunities for generating organic
growth of its insurance product and the formation of NxGen 360, LLC to
launch and distribute certain insurance products to automobile dealers
and wholesalers, were also included.
The outlook reflects RVI's operating results, risk-adjusted
capitalization as measured by Best's Capital Adequacy Ratio and its
continued leading market position in providing residual value insurance.
However, the ratings may be subject to change (i.e., downgraded or
upgraded) and the outlook revised, again, should substantial changes
occur in the following areas: financial market and/or economic
conditions; demand for RVI's residual value insurance product;
risk-adjusted capital position; or operating performance.
These positive rating factors are tempered by RVI's narrowed business
profile as its primary business segments-passenger vehicle, commercial
equipment and real estate-are highly dependent upon the performance and
cyclicality of the asset-based financing/lending industry where RVI now
predominately provides lower levels of risk coverage and catastrophe
risk transfer. A less robust asset-based lending environment may
constrain premium growth in the near future. In addition, there is an
element of uncertainty that may potentially impact RVI's operations and
financial condition as a result of: proposed changes to lease accounting
standards. Even though the impact to RVI appears to be minimal based
upon the latest tentative broad decisions by both the Financial
Accounting Standards Board and the International Accounting Standards
Board, there still exists an element of uncertainty because the
decisions become final only after a formal written ballot to issue a
financial standards update occurs. Additionally, the tax court
resolution of an Internal Revenue Service issue regarding its public
release (December 9, 2011) of a technical advice memorandum (2011 TAM),
which concluded that a contract labeled "residual value insurance" that
"insures" against market decline is not a contract of insurance for
federal income tax purposes, still needs to be resolved.
The methodology used in determining these ratings is Best's Credit
Rating Methodology, which provides a
comprehensive explanation of A.M. Best's rating process and contains the
different rating criteria employed in the rating process. Best's Credit
Rating Methodology can be found at www.ambest.com/ratings/methodology.
A.M. Best Company is the world's oldest and most authoritative
insurance rating and information source. For more information, visit www.ambest.com.
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