AM Best has downgraded the long-term issuer credit rating (long-term ICR) to “bbb” (Good) from “bbb+” (Good) and affirmed the financial strength rating (FSR) of B++ (Good) of Switzerland-based Kot Insurance Company AG (Kot). Kot is the captive reinsurer of Petroleos Mexicanos (PEMEX), the Mexican state-owned oil and gas company. The outlook of the long-term ICR has been revised to stable from negative, while the outlook of the FSR is stable. The credit ratings reflect Kot’s balance sheet strength, which AM Best assesses as “very strong”, its strong operating performance, neutral business profile and appropriate enterprise risk management. The ratings also reflect a rating drag due to the company’s association with PEMEX. The downgrading of the long-term ICR reflects the further deterioration of PEMEX’s credit profile since AM Best’s last rating review. AM Best says: “Kot’s very strong balance sheet is underpinned by its risk-adjusted capitalisation at the strongest level, as measured by its capital adequacy ratio (BCAR).” It 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, according to AM Best. Kot’s robust historical earnings have been driven by its underwriting account, with a five-year (2018-2022) weighted average combined ratio of 38.3 per cent, as calculated by AM Best. However, results are exposed to volatility stemming from low frequency, high severity losses, whilst all underwritten risks are concentrated in Mexico. Kot remains well-integrated within PEMEX as its only reinsurance captive and is important to the group as a cost-effective risk management tool.
