AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb” (Good) from “bbb+” (Good) and affirmed the Financial Strength Rating (FSR) of B++ (Good) of Kot Insurance Company AG (Kot) (Switzerland). The outlook of the Long-Term ICR has been revised to stable from negative, while the outlook of the FSR is stable.
The Credit Ratings (ratings) reflect Kot’s balance sheet strength, which AM Best assesses as very strong, its strong operating performance, neutral business profile and appropriate enterprise risk management. The ratings also reflect a rating drag due to the company’s association with Petroleos Mexicanos (PEMEX). Kot is the captive reinsurer of PEMEX, the Mexican state-owned oil and gas company.
The downgrading of the Long-Term ICR reflects the further deterioration of PEMEX’s credit profile since AM Best’s last rating review. This is partly mitigated by the robust reinsurance regulatory regime in Switzerland, with strict requirements for capital adequacy and corporate governance, which provides some comfort over Kot’s prospective financial strength and independence.
Kot’s very strong balance sheet is underpinned by its risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). AM Best expects Kot to maintain a buffer over the minimum requirements for the strongest BCAR assessment in the medium term, supported by its relatively low net underwriting leverage and conservative investment strategy. An offsetting rating factor in the balance sheet strength assessment is Kot’s dependence on reinsurance to write risks with very high gross limits. The risk associated with this dependence is mitigated partly by a diversified retrocession panel and long-standing relationships with reinsurers of good credit quality.
Kot’s robust historical earnings have been driven by its underwriting account, with a five-year (2018-2022) weighted average combined ratio of 38.3% (as calculated by AM Best). However, results are exposed to volatility stemming from low frequency, high severity losses, whilst all underwritten risks are concentrated in Mexico. In 2022, the combined ratio improved to 44.9% (from 85.8% in 2021) driven by lower claims activity. Underwriting results remained strong during the first six months of 2023, but a large offshore oil platform fire in third-quarter 2023 is likely to negatively affect year-end results. AM Best expects the captive’s operating performance to remain supportive of a strong assessment over the cycle.
Kot remains well-integrated within PEMEX as its only reinsurance captive and is important to the group as a cost-effective risk management tool.
AM Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated 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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