29 January 2016Actuarial & underwriting

Monticello’s IFS rating placed under review by Moody’s

Moody's Investors Service has placed under review for downgrade the Ba1 insurance financial strength (IFS) rating of Monticello Insurance, the captive reinsurance subsidiary of Brazil-based Vale, one of the largest metal and mining companies in the world.

The rating action follows Moody's review for downgrade of Vale's ratings. Moody's said the review for downgrade of Monticello’s Ba1 rating reflects the company’s close integration and linkages with the global risk management function of the group, implying that a downgrade of Vale's rating will likely result in a downgrade of the captive's rating.

The rating agency added that Monticello is a core part of Vale's risk-management programme and is the sole insurance captive utilised in Vale's property insurance and business interruption programme worldwide. Explicit support from Vale to Monticello, which has been provided through capital injections- totalling $240 million over the past three years -and ongoing financial support to cover losses is a key driver of Monticello’s credit rating, absent which, Monticello’s rating would be lower.

The rating agency expects that Monticello will continue to receive extensive parental support from Vale, including the parent company's willingness to backstop Monticello’s obligations to its fronting insurance carriers, and to provide additional capital to Monticello in the event that it has insufficient funds to meet its obligations under the reinsurance assumed.

Monticello’s rating is constrained by its product risk concentration and significant risk exposures, which has resulted in earnings volatility - reflected by net losses in 2012 -, as well as the weak sovereign credit profile and operating environment of Barbados, where Monticello is domiciled.

Given the review for downgrade of Monticello’s rating, an upgrade is unlikely, but a confirmation of Vale's rating could lead to a confirmation of Monticello’s rating. Conversely, Monticello’s rating could be downgraded if Vale's rating is downgraded; if support from the group to the captive company is reduced; if the captive reinsurer begins to cover risks of external (i.e. non-Vale) entities or engages in non-reinsurance business; or if Barbados' sovereign rating (currently B3, negative outlook) is downgraded.

Moody's notes that Monticello’s ratings are above the Ba3 sovereign ceiling for Barbados, primarily reflecting the fact that Monticello's premiums come from countries outside Barbados, as well as the ownership and strong support of the parent company and its operations outside of Barbados.