16 November 2022Property and Casualty Acturial

AM Best affirms Kot ratings

AM Best has affirmed the financial strength rating of B++ and the long-term issuer credit rating of “bbb+” of Switzerland-based Kot Insurance Company.

Kot is the captive reinsurer of Petroleos Mexicanos (PEMEX), the Mexican state-owned oil and gas company.

The outlook of the FSR is stable, while the outlook of the long-term ICR is negative.

Am Best said that the ratings reflect Kot’s balance sheet strength, which the rating agency assesses as very strong, its strong operating performance, neutral business profile and appropriate enterprise risk management. The ratings also reflect rating drag due to its association with PEMEX.

However, the negative long-term ICR outlook reflects ongoing pressures on PEMEX’s credit profile due to its negative free cash flow, high debt maturities and the resultant liquidity strain. Kot remains well-integrated within PEMEX and is important to the group as a cost-effective risk management tool. However, as PEMEX’s only reinsurance captive, Kot’s underwritten risks are concentrated in Mexico.

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 (2017-2021) weighted average combined ratio of 40% (as calculated by AM Best). However, results are exposed to some degree of volatility stemming from low frequency, high severity losses and in 2021, the combined ratio deteriorated to 85.8% (from 34.3% in 2020) driven by a significant claim affecting Kot’s offshore book of business, as well as a series of other mid-sized losses. Underwriting results improved again during the first six months of 2022, and AM Best expects the captive’s operating performance to remain supportive of a strong assessment over the cycle.