AM Best has affirmed the financial strength rating of ‘B++’ (Good) and the long-term issuer credit rating of “bbb” (Good) of Switzerland-domiciled Kot Insurance Company AG. The outlook for the ratings is stable.
Kot is the captive reinsurer of Mexican state-owned oil and gas company, Petroleos Mexicanos (PEMEX).
PEMEX is one of the largest captives domiciled in Switzerland and is self-managed.
The captive is well-integrated within PEMEX as its only reinsurance captive and is important to the group as a cost-effective risk management tool.
The 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.
Kot’s balance sheet strength is underpinned by its risk-adjusted capitalisation at the strongest level, as measured by Best’s capital adequacy ratio (BCAR).
AM Best expects Kot to maintain a buffer over the minimum requirement for the strongest BCAR assessment over the medium term.
This reflects its strategy to maintain sufficient capital to absorb potential volatility from its exposure to low frequency, high severity losses.
A partially offsetting balance sheet factor is the captive’s reinsurance dependence, driven by the large policy limits it offers to PEMEX, though the associated credit risk is mitigated partly by a diversified retrocession panel and relationships with reinsurers of sound credit quality.
Kot has a track record of strong operating performance, generating a five-year (2019-2023) weighted average return on equity ratio of 15.0%.
Results over the cycle have been underpinned by good underwriting performance, albeit subject to volatility, as demonstrated by a significant loss related to an offshore platform fire, resulting in a combined ratio of 94.5% for 2023.
Despite this, Kot reported a healthy five-year (2019-2023) weighted average combined ratio of 53.4%, and AM Best expects the captive’s underwriting performance to be favourable over the longer term.
“Kot’s financial strength is negatively affected by the weaker credit profile of PEMEX, which has deteriorated in recent years,” AM Best said.
“This is partly mitigated by the robust reinsurance regulatory regime in Switzerland, with strict requirements for capital adequacy and corporate governance, which provides some comfort over Kot’s prospective financial strength and independence from its parent.”