MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned a 'B' International Insurer Financial Strength (IFS) rating and 'BBB-(mex)' National Scale IFS rating to Der Neue Horizont Re, S.A. (e). The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings were assigned based on a stand-alone approach which indicates that the company is rated strictly based on individual financial profile. In this case, Der Neue's assessment turns into IFS. Fitch's decision to use an individual approach is based on the lack of elements to determine stakeholder's credit profile in order to provide support whenever the insurance is under pressure, also, external barriers may exist restricting capital/resources transfer among subsidiaries.
As of Dec. 13, 2014, Der Neue was authorized by Insurance and Surety National Commission (CNSF); as of June 2015, the company has grown up to USD12 million; at same date, Der Neue is the second larger company in terms of premiums taken in the agricultural sector. Fitch recognizes that market conditions benefit company growth; nevertheless, such expansion must be coherent with both the financial and operational capacities of the company. The inherent lack of track record is a significant limitation on the current ratings.
The company's financial performance is initially limited by risks faced by a start-up company in a highly competitive market. In this sense, Der Neue's capacity to generate critical mass of premiums that allow it to absorb initial operative costs, among a competitive market and limited to products marketing, will be determining for future performance of the insurer. Also, considering the low risk retention plan (less than 5% of premiums) the future development of the company relies on its ability to retain a good reinsurance portfolio and also good underwriting results in order to maximize the commission income; a key portion of its expected recurring revenues.
Stakeholders have proven willingness to provide support through capitalization that sums up to USD5.9 million. Through Board of Directors underwriting is limited to appetite defined by its stakeholders, which is a conservative approach. Liabilities to assets ratio is of 2.27x, under market average of 6.09x; also, earned net premium plus adjusted assets by equity resulted in 0.95, favorable compared to 7.04x of the sector. The business plan of the company calls for maximum leverage (liabilities to equity) of 1.48x; while the expected low retention level should yield a ratio of net retained premiums to equity no higher than 18%.
Der Neue's equity level to leverage its growth strategy in the short term is adequate and aligned with assumed risks, although the projections provided may be sensible a changes in terms of expected claims ratios, expenses or cost of the reinsurance program. Fitch will monitor how possible departures on the performance of the company may affect its internal capital generation, so far the only expected source of capital injections.
Investment portfolio is concentrated in Mexican federal government instruments; also, 99% of the portfolio to cover technical reserves is invested in CETES payable in 28 days, the remaining is invested in a repo. As of June 2015 liquid assets by reserves indicator was of 6.41x favorably compared to sector's average of 0.93x. The company expects to preserve its current investment policy maximizing low risk federal government instruments as the vast majority of its investments.
The company manages a diversified reinsurance program through quota share contracts for agricultural sector comprised of; Swiss Re, Partner Re, Liberty Sindicates, Oddysey Re, Reaseguradora Patria and Qatar Re; Swiss Re is the major participant. Risk exposure of the company represents 0.16% of equity, which in Fitch's opinion is adequate. Despite the former, Fitch acknowledges that the presented business plan relies intensively on a good-quality and wide-scope reinsurance program, which is a challenge to maintain over time for a recently started company. Changes in the reinsurance program may depend on changes in the current ratings.
Upside potential is somehow tied to the successful achievement of the business plan of the company in the next three years and its ability to post positive operational results, good quality on its investments and a conservative reinsurance program. Failure to deliver results as indicated on its business plans in terms of premium growth, retention levels and overall profitability and capitalization may result in a rating downgrade.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
Der Neue Horizont Re, S.A.
--Insurer Financial Strength 'B';
--National Insurance Financial Strength 'BBB-(mex)'.
Date of Relevant Rating Committee: Dec. 9, 2015.
Additional information is available on www.fitchratings.com
Insurance Rating Methodology (pub. 16 Sep 2015)
Dodd-Frank Rating Information Disclosure Form