NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Provincial de Reaseguros, C.A.'s (Pro Re) International Insurer Financial Strength (IFS) rating at 'B' with a Negative Outlook and its National IFS rating at 'A-(ven)' with a Stable Outlook.
KEY RATING DRIVERS
The affirmation of the ratings reflects Pro Re's improving profitability as a result of its good technical performance, with a combined ratio consistently below 100%, as well as its adequate capitalization and liquidity position.
However, Pro Re's ratings are currently capped by Venezuela sovereign's long-term Issuer Default Rating (IDR) of 'B', while the Negative Outlook on the company's International rating is in line with the Negative Outlook on the sovereign ratings. This is because Pro Re has an important level of government debt holdings (24% of invested assets as of June 2014), and it does not have sufficient overseas business diversification to counterbalance this. Venezuela remains as the main market in the company's geographical distribution of gross written premiums (97% of total as of June 2014).
Fitch has also considered the small scale of the company compared with global and regional reinsurance companies and the high potential for government intervention in the private sector.
As of June 2014 Pro Re's high profitability is driven by its good combined ratio (77%) as a result of a continued strong growth rate in premiums (61%), even higher than its forecast (55%), and by a good performance on the net loss ratio (31% average in the last five years) offsetting a high expense structure. The company's operating margins improved to 16% in June 2014 from 13% in June 2013.
On the other hand, Fitch notes a relevant participation of unrealized gains from revaluation of real estate assets (38% of total capital as of June 2014); however the capital position of the company benefits from a high profitability and the reinvestment of 100% of profits in the last years. Therefore, Pro Re's shows an improvement on its leverage ratios, although still above the median of higher rated reinsurance companies around the world.
Fitch also notes the adequate liquidity position of the company, which increased during the last year due to the high growth dynamic in premiums. Fitch expects the company to sustain an adequate liquidity position as a result of a conservative allocation of its investment portfolio in fixed-income instruments (80% of invested assets as of June 2014), the absence of financial debt and the reasonable behavior of its retrocessionaires. Pro Re's liquid assets/net reserves and liquid assets/liabilities ratios were of 2.1x and 1.1x, respectively as of June 2014.
RATING SENSITIVITIES
Fitch considers that an upgrade is unlikely in the near future because Pro Re's International rating is currently rated at Venezuela's long-term IDR. Consequently, additional negative movements in the sovereign rating may trigger negative movements in Pro Re's ratings, while a change in the sovereign Outlook to Stable, could also lead to a Stable Outlook for the company.
Key rating triggers that could lead to a downgrade include 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. Meanwhile under a higher sovereign rating scenario, key 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 that remain steadily above 2.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology - Global Master Criteria' (Sept. 4, 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=886114
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