November 22, 2017 / 2:59 PM / a year ago

Fitch Assigns IFS Rating of 'BBB+' to Monticello Insurance Limited

(The following statement was released by the rating agency) RIO DE JANEIRO, November 22 (Fitch) Fitch Ratings has assigned an Insurer Financial Strength (IFS) rating of 'BBB+' to Monticello Insurance Limited (MIL) with a Stable Outlook. KEY RATING DRIVERS MIL's IFS rating is driven by expected support from its ultimate parent Vale S.A. (Vale; Long-Term Foreign and Local Currency Issuer Default Ratings, BBB+/Stable). MIL is wholly owned by Vale International S.A. (VISA), which in turn is 100% owned by Vale. Fitch considers MIL a core captive of Vale and therefore equalizes MIL's IFS with Vale's Long-Term IDRs. This is because MIL's mission and goals are tied to Vale's risk management and risk financing strategy, all its business is derived from the parent, it is not viewed as a profit center for the group, but rather, its objective is to improve Vale's efficiency and to support operational and financial optimization efforts. MIL, domiciled in Barbados, is fully integrated with Vale's global risk management function. In accordance with Fitch's insurance rating criteria, Barbados' sovereign and country-related constraints to do not apply to MIL given the support-driven ratings and the fact that the bulk of MIL's investments and revenues are based outside Barbados. Vale provides financial support to MIL in various forms. It gives parental guarantees to the letters of credit written by MIL to its fronting insurers, and timely capital contributions into MIL when the need arose in the past. Most recently, in 2012 and 2013, the group provided USD241 million of capital to MIL, when its capital eroded significantly due to large losses. Since the capital contributions of 2012 and 2013, MIL's capitalization has remained strong and leverage quite low. This was supported by declining business volumes, an increase in retained earnings and non-payment of dividends during this period. Capitalization and leverage ratios could be affected negatively by potential large losses, but Fitch believes parent support would be forthcoming, should there be a need. MIL's profitability has been volatile since 2013 due to large oscillations in the loss ratio in 2014 and 2015. That said, cumulative earnings between 2013 and 2016 totalled USD70 million, which corresponded to about 20% of MIL's assets at end-2016. MIL's administrative expenses and acquisition costs have been broadly stable in this period. MIL's financial income from its investments is a meaningful and stable source of earnings. As of December 2016, MIL's loans to VISA made up 90% of its liquid assets, with the balance being held as cash at 'A' category rated international banks outside Barbados. Loans to the parent company are renewed every quarter, have yields at market rates and are repayable on demand in 10 days. MIL has high liquidity ratios, as the loans to the parent company are considered liquid assets. At December 2016, liquid assets corresponded to 1.8x net technical reserves. MIL's retention ratio (net earned premium/gross earned premiums) has fallen gradually from 98% in 2013 to 73% in 2016. Despite the still relatively high retention ratio, MIL is protected from extremely large losses through its reinsurance contracts. The large contracts are well diversified across a sufficient number of 'A' category rated reinsurers. RATING SENSITIVITIES MIL's IFS rating would be affected by changes in Vale's ratings or in Fitch's assessment of MIL as a core captive insurer of Vale. Contact: Primary Analyst Esin Celasun Director +55 21 4503 2626 Fitch Ratings Brasil Ltda. Praca XV de Novembro, 20 - 401 B Rio de Janeiro, RJ, Brazil Secondary Analyst Eugenia Martinez Associate Director +52 81 8399 9155 Committee Chairperson Donald Thorpe Senior Director +1-312-606-2353 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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