AM Best has assigned a Financial Strength Rating of A- (Excellent) and a Long-Term Issuer Credit Rating of “a-” (Excellent) to Triple Crown Assurance Co. (TCA) (Dallas, TX). The outlook assigned to these Credit Ratings (ratings) is stable.

TCA is a captive insurance company wholly owned by Southwest Airlines Co. (SWA), a Texas-based company that operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near-international markets.

The ratings reflect TCA’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).

TCA’s level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is assessed at the strongest level, where AM Best expects it to remain in future years. The balance sheet strength assessment also considers the company’s conservative investment strategy, adequate liquidity measures and favorable loss reserve development over the last few years; however, this is partially offset by the captive’s elevated exposure to credit risk relative to its reinsurance treaties, as well as its higher-than-average underwriting leverage metrics. Elevated credit risk arises from TCA’s participation in a contractual reinsurance arrangement with several creditworthy participating captives, although there has not been any credit loss among participants in the nearly 30-year history of the arrangement.

TCA’s operating performance has been profitable as demonstrated by its five-year average combined ratios and net return on equity measures. Consistent operating profits are attributable to favorable underwriting results, and to a lesser extent, investment income in each of the last five years, which together, have enabled the captive to grow surplus. Furthermore, TCA’s operating performance reflects the inherent benefits of being a captive insurer as it has minimal acquisition costs and administrative expenses, driving its favorable expense ratio.

The business profile is assessed as limited, as a single-parent captive established to provide various insurance coverages for its only policyholder, SWA, including workers’ compensation, employers' liability, medical expense cost containment (MECC), terrorism, aviation, hail, and hull and liability risk coverages. Policies are written on an occurrence basis. The senior management team is experienced in the airline industry and collaborates with a third-party captive manager in managing TCA.

ERM is considered appropriate as an extension of the ultimate parent’s ERM. SWA has implemented an active risk management approach, enabling all affiliated subsidiaries to appropriately manage their risks in line with the organization's overall strategic direction and risk appetite. TCA is an integral component of SWA’s ERM program as it provides specific insurance coverages to SWA more efficiently than the traditional market.

The stable outlooks reflect AM Best's expectation that TCA’s balance sheet strength will remain at a very strong level, underpinned by its strongest level of risk-adjusted capitalization, while underwriting and operating remains in line with AM Best-rated peers with assessments of adequate. Negative rating actions could occur if future operating results are not in line with an assessment of adequate and/or if there is a significant deterioration in risk-adjusted capitalization. Negative rating actions could also occur if AM Best's perception of SWA’s ability and willingness to support TCA changes. Positive rating action could result if TCA’s level of operating performance demonstrates improvement over several years and results align more appropriately with peers assessed as strong.

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.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

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