Fitch Assigns Initial 'B' IFS Rating to Provincial de Reaseguros, C.A.; Outlook Negative

NEW YORK--()--Fitch Ratings has assigned an initial 'B' Insurer Financial Strength (IFS) rating to Provincial de Reaseguros, C.A. (Pro Re). The Rating Outlook is Negative.

KEY RATING DRIVERS

The rating is based on Pro Re's sustained good technical performance, with a combined ratio consistently below 100% and better than that of peers. Fitch also considers Pro Re's adequate liquidity position, solid retrocession coverage and improved capital quality.

The rating is limited by its small scale compared with global and regional reinsurance companies, and the challenges posed by its large business concentration in Venezuela, which may result in significant volatility in the operating environment. Pro Re is not only exposed to underwriting risks from the operating environment, but also investment risks from its significant holdings of Venezuelan sovereign debt (foreign currency Issuer Default Rating [FC IDR] 'B'/Outlook Negative). In addition, the potential for government intervention in the private sector remains high. The Negative Rating Outlook applied to Pro Re mirrors the sovereign Rating Outlook.

Pro Re's profitability is driven by its good combined ratio (81% as of June 2013), which is better than its relevant peers in Venezuela (89%). The combined ratio reflects good performance on the net loss ratio (33% average in the last five years) offsetting a high expense structure.

Fitch expects Pro Re's quality of capital to improve given its good operating performance, high reinvestment of profits and lower unrealized gains from revaluation of real estate assets. The last item is due to the sale of the largest fixed-asset in the portfolio. However, the agency believes that sustained high premium growth in the company will make its leverage ratios remain similar to peer averages, and above the median of higher rated reinsurance companies around the world.

Pro Re exhibits liquid assets/net reserves and liquid assets/liabilities ratios of 1.4x and 1.0x, respectively, which are similar to the sector's averages as of December 2013. Fitch expects the company to maintain an adequate liquidity position, due to the allocation of its investment portfolio in fixed-income instruments, the absence of financial debt and the reasonable behavior of its retrocessionaires.

The exposure to non-liquid investments and Venezuela's sovereign debt is sizable compared to the company's capital base (around 100% as of December 2013); which may limit its flexibility in times of stress.

Pro Re's retained risks are protected trough excess-loss treaties. The company has long-standing relationships with internationally renowned reinsurers that have good credit quality. Pro Re's capital exposures per risk and event are reasonable.

RATING SENSITIVITIES

Additional negative movements in the sovereign rating may trigger negative movements in Pro Re's rating due to its exposures in the country, while a change in the sovereign Outlook to Stable, could also lead to a Stable Outlook for the company. Aside from sovereign considerations, Pro-Re's rating could be downgraded after a sustained deterioration in Pro Re's operating performance with a combined ratio above 100%, a significant deterioration in its operating leverage ratio exceeding 3.5x, and a reduction in liquid asset/net reserves ratio to less than 1.0x.

Fitch does not anticipate an upgrade in the near term given the aforementioned sovereign constrains. Under a higher sovereign rating scenario, rating triggers that could lead to an upgrade include a significant improvement in operating leverage ratio below 3.0x and a liquid asset/net reserves ratio sustained above 2.0x.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology', Sept. 5, 2013.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825646

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Contacts

Fitch Ratings
Primary Analyst
Franklin Santarelli
Managing Director
Fitch Ratings, Inc.
+1-212-908-0739
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Jazmin Roque
Associate Director
+503 2516-6607
San Salvador, El Salvador
or
Committee Chairperson
Julie Burke
Managing Director
+1-312-368-3158
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Franklin Santarelli
Managing Director
Fitch Ratings, Inc.
+1-212-908-0739
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Jazmin Roque
Associate Director
+503 2516-6607
San Salvador, El Salvador
or
Committee Chairperson
Julie Burke
Managing Director
+1-312-368-3158
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com