AM Best assigns rating to Pemex captive

AM Best has assigned a financial strength rating of B++ (Good) to Kot Insurance Company, the captive reinsurer for Petroleos Mexicanos (PEMEX), the Mexican state-owned oil and gas company.

The outlook for the rating is stable and reflects Kot’s balance sheet strength, which AM Best categorises as very strong, and its strong operating performance, neutral business profile and appropriate enterprise risk management. It also takes into account the weaker credit profile of PEMEX, the parent.

Kot’s very strong balance sheet is underpinned by risk-adjusted capitalisation at the strongest level, as measured by AM Best’s capital adequacy ratio (BCAR). The rating agency said it 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.

AM Best warned that Kot has a high dependence on reinsurance to write large risks, but said the associated risk is partly mitigated by long-standing relationships with reinsures of good credit quality.

Kot’s robust historical earnings have been driven by its underwriting account. The combined ratio remained excellent at 20 percent in 2019, below the five-year weighted average of 38 percent, AM Best said.

AM Best expects the captive’s operating performance to remain supportive of a strong assessment, although prospective results are exposed to some degree of volatility stemming from low frequency, high severity losses.

Kot is well-integrated within PEMEX and is important to the group as a cost-effective risk management tool, AM Best noted. However, as PEMEX’s single reinsurance captive, Kot’s underwritten risks are concentrated in Mexico, it added.