1 March 2016Actuarial & underwriting

Moody’s downgrades ratings of Vale’s captive subsidiary

Moody's Investors Service (MIS) has downgraded the insurance financial strength (IFS) rating of Barbados-based Monticello Insurance Limited (MIL) to B1, from Ba1, with a negative outlook.

Monticello is the captive reinsurance subsidiary of Brazil-based Vale,one of the largest metal and mining companies in the world. The downgrade follows Moody's announcement on February 26 of the downgrade of Vale.

The rating downgrade of MIL to B1, from Ba1, with a negative outlook, reflects the downgrade of Vale's rating to Ba3 from Baa3, also with a negative outlook. According to Moody's, MIL's IFS rating benefits from the support provided by Vale, reflecting Monticello's close integration with the global risk management function of the group. Therefore, the lowering of the parent's rating to Ba3 has resulted in both a somewhat diminished fundamental credit profile, and weakened level of support, for Monticello, resulting in the downgrade of the captive's IFS rating to B1.

MIL 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 program worldwide. Explicit support from Vale to MIL, 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 MIL's credit rating. The rating agency expects that MIL will continue to receive parental support from Vale to backstop MIL's obligations to its fronting insurance carriers, although that support is ultimately limited by Vale's intrinsic credit strength.

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

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