AM Best has affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb” (Good) of Kot Insurance Company AG (Kot) (Switzerland). The outlook of these Credit Ratings (ratings) is stable. Kot is the captive reinsurer of Petroleos Mexicanos (PEMEX), the Mexican state-owned oil and gas company.

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. The ratings also reflect a rating drag due to the company’s association with PEMEX.

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; therefore, reflecting its strategy to maintain sufficient capital to absorb potential volatility stemming 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. However, the associated credit risk is mitigated partly by a diversified retrocession panel and long-standing 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 (as calculated by AM Best). Nonetheless, the captive reported a healthy five-year (2019-2023) weighted average combined ratio of 53.4%. Prospectively, AM Best expects the captive’s underwriting performance to be favourable over the longer term, albeit subject to potential volatility given its high net line sizes relative to its premium base.

Kot remains well-integrated within PEMEX as its only reinsurance captive and is important to the group as a cost-effective risk management tool.

Kot’s financial strength is negatively affected by the weaker credit profile of PEMEX, which has deteriorated in recent years. 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.

AM Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated throughout the world. For current Best’s Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

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