MEXICO CITY--(BUSINESS WIRE)--A.M. Best has affirmed the Financial Strength Rating of A (Excellent), the Long-Term Issuer Credit Rating (Long-Term ICR) of “a” and the Mexico National Scale Rating of “aaa.MX” of Reaseguradora Patria, S.A. (Patria Re) (Mexico). The outlook of these Credit Ratings (ratings) is stable.
A.M. Best also has affirmed the Long-Term ICR of “bbb” of Patria Re’s ultimate parent, Peña Verde, S.A.B. (Peña Verde) (Mexico). The outlook of this rating is stable. Per A.M. Best’s methodology on insurance holding companies, Peña Verde’s rating reflects a standard notching from Patria Re’s Long-Term ICR and is in line with companies of the same rating level.
The ratings reflect Patria Re’s excellent risk-adjusted capitalization, low underwriting leverage, comprehensive enterprise risk management infrastructure, expansive knowledge of its core markets in Latin America, as well as the company’s strong liquidity metrics and the initial implementation of its overseas expansion.
Offsetting these strengths is Patria Re’s relatively important participation of equities in its investment portfolio, which could add volatility to the company’s financial products. In addition, the company is expanding outside its niche market, which poses additional risks in terms of underwriting and implementation of such expansion strategy.
Patria Re has established a solid niche position in Mexico and Latin America, which allows it to accept profitable business selectively, while maintaining a diversified product portfolio tailored to specific markets. This strategy has resulted in consistently favorable underwriting results over the years and has contributed to Patria Re’s enhanced risk-adjusted capitalization. The company maintains excellent capitalization levels, as measured by Best’s Capital Adequacy Ratio (BCAR), reinforced by a well-balanced reinsurance program placed among counterparties with a strong security level to support its operations. Furthermore, the company’s underwriting leverage has remained at conservative levels for the past five years.
At year-end 2015, the company registered a return on equity and return on assets of 8.5% and 5%, respectively, mainly supported by improved underwriting results and unrealized gains in its investment portfolio. While claims from catastrophe events, such as the earthquake in Ecuador and Hurricane Earl have pressured the company’s operating performance in 2016, reflected in higher combined ratios, A.M. Best expects these metrics to decrease at the end of the year due to reinsurance recoveries and as a reflection of its strong underwriting practices.
While the company holds a larger percentage of its investment portfolio in equities in comparison with other peers, which could lead to higher volatility in its financial income, Patria Re historically has maintained such positions and keeps a long-term investment horizon for these assets. Given its prudent reserve practices and strong capital position, the company has not been required to materialize any unrealized losses from any of these investments to cover unusual deviations in claims arising from the catastrophic nature of its portfolio.
In 2015, Patria Re’s risk profile shifted as a result of its assumption of exposures outside of its core markets through Patria Corporate Member Ltd (Lloyd’s syndicate) and Patria Re Marketing Services Ltd in the U.K., and Patria Re Servicios, S.A. in Chile. While this affords the company a planned geographic diversification, it is expanding into highly competitive and mature markets. Furthermore, the reinsurance sector as a whole faces significant pricing pressure in a low interest rate cycle, with third-party capital taking a larger share of property catastrophe business and primary companies retaining more business.
A.M. Best considers Patria Re to be well-positioned at its current rating level. Factors that could lead to positive rating actions include continued strong underwriting and overall results in conjunction with the maintenance of excellent risk-adjusted capitalization, improvements in the performance of its investment portfolio, as well as continued and successful operation of its overseas expansion. Factors that may lead to negative rating actions include a sustained decline in underwriting profitability, significant deterioration in risk-adjusted capitalization and unsuccessful operations of the company’s overseas expansion plans.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
- A.M. Best’s Ratings On a National Scale (Version Sept. 5, 2014)
- Analyzing Insurance Holding Company Liquidity (Version March 25, 2013)
- Catastrophe Analysis in A.M. Best Ratings (Version Nov. 3, 2011)
- Evaluating Country Risk (Version May 2, 2012)
- Insurance Holding Company and Debt Ratings (Version May 6, 2014)
- Rating Members of Insurance Groups (Version Dec. 15, 2014)
- Risk Management and the Rating Process for Insurance Companies (Version April 2, 2013)
- Understanding Universal BCAR (Version April 28, 2016)
View a general description of the policies and procedures used to determine credit ratings. For information on the meaning of ratings, structure, voting and the committee process for determining the ratings and monitoring activities, please refer to “Understanding Best’s Credit Ratings.”
- Previous Rating Date: Oct. 7, 2015
- Date of Financial Data Used: Sept. 30, 2016
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