AM Best, a globally recognized credit rating agency focused on the insurance industry, has assigned a Financial Strength Rating (FSR) of B++ (Good) and a Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb+” (Good) to Cadence Indemnity Inc. (Cadence), headquartered in Galveston, Texas. The outlook attached to both of these Credit Ratings (collectively referred to as “ratings”) is stable, indicating AM Best’s expectation that Cadence’s credit profile will likely remain consistent over the near to medium term.
Overview of the Ratings and Their Significance
The ratings assigned to Cadence are based on a comprehensive evaluation of the company’s overall financial health, operating performance, business profile, and enterprise risk management (ERM) framework. Specifically, AM Best’s assessment reflects:
- Strong balance sheet strength
- Adequate operating performance
- Limited business profile
- Appropriate enterprise risk management practices
Balance Sheet Strength: Supported by Strong Capitalization and Conservative Underwriting
AM Best has determined that Cadence’s balance sheet strength is strong, a key pillar of the company’s overall financial assessment. One of the principal factors contributing to this positive evaluation is Cadence’s risk-adjusted capitalization, which is currently at the strongest level, as measured by AM Best’s proprietary Best’s Capital Adequacy Ratio (BCAR). The BCAR framework is used to analyze an insurer’s ability to absorb potential losses relative to the risks it underwrites and its investment exposures. Cadence’s high BCAR score indicates that the company maintains a solid capital cushion relative to its risk exposure, supporting policyholder obligations even under stress scenarios.
In addition to robust capitalization, Cadence’s balance sheet benefits from low underwriting leverage. This reflects the company’s conservative approach to underwriting, where the ratio of net premiums written to surplus remains low, reducing pressure on the capital base. Furthermore, Cadence demonstrates limited reliance on reinsurance, retaining a significant portion of its risk exposures in-house. This approach minimizes counterparty risk and provides more control over claims handling and underwriting policies.
However, there are certain offsetting factors to consider. One notable concern highlighted by AM Best is Cadence’s high per-occurrence retention limits, particularly on its marine builders’ risk coverage. The company retains significant risk exposure on individual large claims relative to the size of its surplus, which could subject the balance sheet to volatility in the event of large, unexpected losses. Additionally, the insurer’s investment portfolio shows a high concentration of equity holdings, a factor that increases potential surplus fluctuations due to stock market volatility. Equity markets can be unpredictable, and a downturn may have a material impact on Cadence’s surplus position, though management appears to have strategies in place to manage this exposure.
Operating Performance: Adequate but Still Developing
When evaluating Cadence’s operating performance, AM Best has assessed it as adequate, though the company’s operational history is relatively short. 2023 and 2024 marked Cadence’s first two full years of operation, and as such, the financial data available is somewhat limited for long-term trend analysis.
During these initial years, investment-related income emerged as the primary driver of pre-tax operating profits, reflecting the company’s strategy of leveraging its investment portfolio to support earnings. Conversely, the underwriting side of the business reported modest underwriting losses in both 2023 and 2024. This performance is not unusual for a newly established insurer still building its underwriting portfolio, fine-tuning pricing strategies, and adjusting to market conditions.
Looking ahead, Cadence’s management projects that investment income will continue to be the cornerstone of profitability, while also expressing confidence that underwriting results will improve over time as the company gains operational experience, expands its book of business, and benefits from economies of scale.
Business Profile: Limited but Focused
AM Best has categorized Cadence’s business profile as limited, reflecting the company’s narrowly defined market focus and product offerings. Cadence operates primarily as a single-parent captive insurer, with a mission to provide affordable, tailored insurance coverage on a direct basis to a specific group of affiliated companies.
Specifically, Cadence serves as the captive insurance vehicle for The Sullivan Brothers Family of Companies (SFBC), a collection of commonly owned operating companies spanning various industries. The captive structure allows SFBC to manage its insurance needs internally, thereby achieving cost efficiencies, customizing coverage terms, and potentially benefiting from favorable risk management practices.
In addition to its direct insurance activities, Cadence also assumes clinic liability coverage through a fronting arrangement with Continental Casualty Company, broadening its business slightly. However, despite this additional risk assumption, the company’s range of products remains narrow, primarily centered around select property, liability, and specialty lines.
While Cadence’s business lines are focused, it does benefit from the geographic diversification associated with SFBC’s national operations. This geographic spread reduces concentration risk from regional events or localized economic conditions. Nevertheless, the overall business profile remains limited, particularly when compared to larger, more diversified commercial insurers.
Enterprise Risk Management: Well-Integrated and Effective
Cadence is recognized for maintaining an appropriate enterprise risk management (ERM) framework, which is a crucial aspect of AM Best’s ratings process. The ERM program is described as well-integrated with the parent organization’s broader risk management infrastructure.
As an extension of SFBC’s risk management philosophy, Cadence emphasizes proactive risk identification, loss control, and mitigation strategies. The company AM Best leverages the operational knowledge and risk insights of SFBC to better understand and manage its exposures. Additionally, Cadence’s ERM framework includes formal governance policies, risk tolerance limits, and ongoing monitoring practices, all contributing to sound risk management outcomes.
Given the captive insurer structure, there is strong alignment of interests between Cadence and its parent companies, which fosters collaboration on risk mitigation initiatives and promotes a long-term view toward financial stability.
