Fitch Affirms Reaseguradora Patria's Ratings; Outlook Stable
Fitch Ratings has affirmed Reaseguradora Patria S.A.'s (Patria) International Insurer Financial Strength Rating (IFS) at 'A-' and National Scale IFS rating at 'AAA(mex)'. The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings are based on balance sheet, operating performance and other key quantitative strengths in which Patria has historically outperformed its peers. Fitch positively views qualitative factors, such as corporate governance and management, and its wide product and market strategy. The current rating is constrained by the company's modest size relative to global reinsurance competitors and above average exposure to variable income investments.
Patria's operating leverage was 0.9x in 2015, a decrease from prior years and consistent with rating expectations. Strong capitalization is the result of stringent Mexican insurance regulation, its conservative dividend policy and its risk-based capital approach. Patria's risk management model is advanced and has proved effective in monitoring and mitigating the company's risks.
Patria has been able to maintain low loss ratios with appropriate underwriting policies and pricing techniques, low participation in high-frequency business lines (auto/health), good internal claims control and its conservative retrocession protection. The company's net loss ratio was 49.7% in 2015, which also resulted in a combined ratio of 92.4%, compared with the prior five-year average of 46.3% and 92.2%, respectively. These results are due higher claims specifically in fire branch. For 2016, Fitch expects claims ratio to be affected by losses caused by Ecuador's earthquake.
The company's net financial income benefited in 2015 from the positive trend in the market value of its investment portfolio, which rose 306% compared to 2014(15% compared to September 2015). This was mainly driven by its position in stocks position which drove up the average return to 24%.
Patria's premium profile is moderately concentrated by client. The largest 10 clients represented 29.6% of total premiums in 2015, but none represented more than 4.6%.
Patria is not dependent on retrocession but rather buys its retro protections to reduce volatility when market pricing is attractive. The company's geographically diversified business profile, conservative underwriting and reserving policies allow the company to manage high retention levels. The company's catastrophic reserves cover 44.7x, the priority under its catastrophic retrocession contract.
Patria's ratings have limited upside potential in the short term given its relative small size in a market where large global players manage the largest share of the reinsurance market. Operating leverage ratio above 1.5x and recurrent high operating catastrophic and financial losses that undermine Patria's profitability and equity base may trigger a negative rating action. Negative movements on Mexico's sovereign rating may trigger a review of Patria's rating given its high exposure to the sovereign, even though it's not considered a likely scenario at the moment.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the ratings for Reaseguradora Patria S.A. as follows:
--IFS at 'A-';
--National IFS at 'AAA(mex)'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Insurance Rating Methodology (pub. 17 May 2016)
Dodd-Frank Rating Information Disclosure Form
+5281 8399 9155
Fitch Ratings Mexico
Prol. Alfonso Reyes 2612, Piso 8, Monterrey NL, 64920
Julie Burke, CPA, CFA
Elizabeth Fogerty, +1 212-908-0526