London–(business wire)–AM Best Kot Insurance Company AG (Kot) (Switzerland) has confirmed that it has a financial strength rating (FSR) of B++ (Good) and a long-term issuer credit rating (Long-Term ICR) of ‘bbb+’ (Good). The FSR outlook is stable, but the long-term ICR outlook is negative.
The Credit Rating (Rating) reflects the strength of Kot’s balance sheet, which AM Best rates as very strong, strong operating results, a neutral business profile and good corporate risk management. The rating also reflects a rating downgrade due to its association with Petroleos Mexicanos (PEMEX).
Kot is the captive reinsurer of PEMEX, Mexico’s state-owned oil and gas company.
The negative long-term ICR outlook reflects continued pressure on PEMEX’s credit profile due to negative free cash flow, high debt maturities and the resulting tightness in liquidity. Kot is well integrated within his PEMEX and is important to the group as a cost-effective risk management tool. However, as PEMEX’s sole reinsurance captive, Cotto’s underwriting risk is concentrated in Mexico.
Kot’s very strong balance sheet is backed by one of the highest levels of risk-adjusted capital as measured by Best’s Capital Adequacy Ratio (BCAR). AM Best expects Kot to maintain a buffer above the minimum requirement for the strongest BCAR rating over 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 reliance on reinsurance to underwrite very high aggregate limits of risk. The risks associated with this dependency are partially mitigated by our diversified retrospective panels and long-standing relationships with high-quality reinsurers.
Kot’s strong earnings to date have been driven by an underwriting account with a five-year (2017-2021) weighted average combined ratio of 40.0% (calculated by AM Best). However, results have been subject to some volatility due to low frequency and high severity losses, with his combined ratio worsening to 85.8% in 2021 (from his 34.3% in 2020). Due to a significant claim that also impacts Kot’s offshore business book. As a series of other medium-sized losses. Underwriting results improved again in the first six months of 2022. AM Best expects captive operating results to continue to support strong valuations throughout the cycle.
AM Best continues to be the leading rating agency for alternative risk transfer entities, with over 200 such vehicles rated worldwide. For current Best credit ratings and independent data on the captive and alternative risk transfer insurance market, please visit: www.ambest.com/captive.
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