NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Reaseguradora Patria S.A.B.'s (Patria) International Insurer Financial Strength Rating (IFS) to 'A-', Stable Outlook, from 'BBB+'. Concurrently, Fitch has affirmed Patria's National Scale IFS rating at 'AAA(mex)', Stable Outlook.
Key Rating Drivers
The upgrade of Patria's international IFS rating and the affirmation of its national scale rating were driven by Patria's solid performance, well-managed catastrophe exposure and leading position in its target markets; the recent upgrade to Mexico's sovereign was also considered for this rating action. Patria's ratings are also based on its balance sheet, performance and other key quantitative strengths relative to peers and industry averages, all in which Patria has performed better the Fitch sector credit factor medians for the 'A' rating category. Fitch views as positive such qualitative factors as corporate governance and management, and the company's wide product and market focus strategy. The current rating is constrained by the size challenges for a reinsurer that competes with global peers and above-average exposure to variable income investments.
Patria is incorporated in Mexico and operates in several countries in Latin America. Thus, its International IFS rating has been historically constrained by Mexico's sovereign rating and macroeconomic risk, as Patria's large holding of sovereign debt makes it vulnerable to any deterioration in the credit quality, market value or liquidity of these securities. Patria's current rating of 'A-' is not considered to be constrained by Mexico's sovereign rating.
Patria is also strongly solvent, as its leverage averaged a low 1.0x in 2009-2012, which is the result of stringent Mexican insurance regulation, its conservative dividend policy, and its risk-based capital approach. Patria's risk management model is advanced and has proved to be effective in monitoring and mitigating the company's risks.
Patria's well-managed Catastrophe Exposure is a key strength. Patria's maximum loss (priority + adjusted retention) under its whole account catastrophic reinsurance represents 5.7% of its total equity; however, this retention is covered 19.3x by its catastrophic reserves (USD132.23 million to December 2012). With this level of reserves and cession, Patria can withstand an estimated event loss of 1,500 years.
Patria's ratings also consider the company's sustained operating improvement in the last few years and its overall good profitability. Revenues and earnings in facultative reinsurance and excess loss treaties nationally and internationally have been growing, leading to a more balanced activity per market, line, and type of business. Fitch expects this further diversification to have a favorable impact on the company's risk profile. Patria's combined ratio for year-end 2012 was 90.5%, down from 93.3% in 2011, and Patria's ROAE improved to 27.0% from 9.9%, benefiting from a lower level of catastrophes claims and an extraordinary investment income gain (MXP502 million) from the sale and valuation of securities.
The company maintains healthy liquidity levels. Patria's MXP1.9 billion variable income holdings (at market value) is relatively large in terms of its equity and catastrophic (CAT) reserves of MXP3.3 billion compared to other global reinsurers. The company's high liquidity position is basically a result of stringent regulation regarding investment diversification, the company's institutional risk model, and the credit quality of its securities and stock portfolio. Around 93% of fixed-income securities are from investment-grade Mexican government-related issuers, and practically all variable income securities are publically traded on the Mexican Exchange Market.
Rating Sensitivities
Patria's ratings have limited upside potential in the short term given its relative size in a market where large global players manage the largest share of the reinsurance market.
An increase above 1.8x in its operating leverage, and recurrent high catastrophic losses that undermine Patria's profitability and equity base may trigger a negative rating action for the company. Also, and even though it is not considered a likely scenario at the moment, negative movements on Mexico's sovereign rating may trigger a review of Patria's rating, given its high exposure to the sovereign.
Additional information is available at 'www.fitchratings.
Applicable Criteria and Related Research:
-- 'Rating FI Subsidiaries and Holding Companies', Aug. 10 2012.
-- 'Insurance Rating Methodology - Global Master Criteria', Jan. 11 2013.
Applicable Criteria and Related Research:
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Insurance Rating Methodology -- Effective Oct. 18, 2012 to Jan. 11, 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=692293
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794158
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