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Fitch Affirms Der Neue Horizont Re's Int'l and Nat'l IFS Ratings at 'B'/'BBB-(mex)'; Outlook Stable
December 8, 2016 / 4:55 PM / a year ago

Fitch Affirms Der Neue Horizont Re's Int'l and Nat'l IFS Ratings at 'B'/'BBB-(mex)'; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, December 08 (Fitch) Fitch Ratings has affirmed Der Neue Horizont Re, S.A.'s (Der Neue) 'B' International Insurer Financial Strength (IFS) rating and National Scale IFS rating at 'B'/'BBB-(mex)'. The Rating Outlook is Stable. KEY RATING DRIVERS The ratings were assigned based on a stand-alone approach which indicates that the company is rated strictly based on its individual financial profile. In this case, Der Neue's assessment is reflected in the IFS. Fitch's decision to use an individual approach is based on the lack of data with which to determine stakeholder's credit profile and inclination to provide support whenever the company is under pressure. Also, external barriers may exist restricting capital/resources transfer among subsidiaries. Der Neue became authorized by Mexico's Insurance and Surety National Commission (CNSF; on Dec. 13, 2014); as of September 2016, the company had grown its capital to USD17.1 million. At year-end 2015, Der Neue was the second largest company in terms of premium taken in the agricultural sector. Fitch recognizes that market conditions benefit company growth; nevertheless, any expansion must be consistent with both financial and operational capacities of the company. The inherent lack of a track record is a significant limitation on the current ratings. The company's financial performance is initially limited by risks faced by a start-up company in a highly competitive market. In this sense, Der Neue's capacity to generate a critical mass in premiums that allow it to absorb operating costs and claims, in a competitive market and limited to product marketing, will be determining for future performance of the insurer. Also, considering the low-risk retention plan (less than 5% of premiums), future development relies on its ability to retain a good reinsurance portfolio and also good underwriting results in order to maximize the commission income which is a key portion of its expected recurring revenues. As of September 2016, the company has not required further capital injection different from the that needed to start operations of MXN92.5 million (USD4.8 million) Through the Board of Directors, underwriting is limited by the appetite defined by its stakeholders, which we consider a conservative approach. Liabilities-to-assets is 1.69x, lower than the market's five-year average of 5.63x; also, earned net premium plus adjusted assets by equity was 1.59x, favorable when compared to the sector's average of 6.72x. The company business plan calls for maximum leverage (liabilities-to-equity) of 3.0x, while the expected low retention level should yield a ratio of net retained premiums-to-equity no higher than 26%. Der Neue's equity level to leverage its growth strategy in the short term is adequate and aligned with assumed risks, though the projections provided may be sensitive to changes in terms of expected claims ratios, expenses, or cost of the reinsurance program. Fitch will monitor how performance of the company may affect its internal capital generation. The investment portfolio is concentrated in Mexican federal government instruments; 60% is concentrated in CETES payable in 28 days, the remaining is invested in debt certificates. As of September 2016, liquid assets by reserves was 1.35x, favorable compared to the sector's five-year average of 0.95x. The company expects to preserve its current investment policy maximizing low-risk federal government instruments as the vast majority of its investments. The company manages a diversified reinsurance program through quota share contracts for the agricultural sector composed of: Swiss Re, Partner Re, Liberty Syndicates, Oddysey Re, Reaseguradora Patria, Qatar Re, TransAtlantic Re, Barents Re, and Navigators Re; Swiss Re is the major participant. Maximum legal retention of the company represents 1.5% of equity, which in Fitch's opinion is adequate. Despite the former, Fitch acknowledges that the presented business plan relies heavily on a good-quality and wide-scope reinsurance program, which is a challenge to maintain over time for a recently started company. Changes in the reinsurance program may arise from changes in the current ratings. RATING SENSITIVITIES Upside potential is somehow tied to the successful realization of the company's business plan in the next two years and its ability to post positive operating results, the good quality of its investments, and a conservative reinsurance program. Failure to deliver results as indicated in its business plans in terms of premium growth, retention levels and overall profitability and capitalization, may result in a rating downgrade. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Der Neue Horizont Re, S.A. --Insurer Financial Strength at 'B'; --National IFS at 'BBB-(mex)'. Contact: Primary Analyst Eugenia Martinez Associate Director +5281 8399 9155 Fitch Ratings Mexico Prol. Alfonso Reyes 2612, Piso 8, Monterrey NL, 64920 Secondary Analyst Rosa Turrubiartes Analyst +52 (81) 83-99-9100 ext.1516 Committee Chairperson Eduardo Recinos Senior Director +503 5216 6600 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Date of Relevant Rating Committee: Dec. 7, 2016 Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016138 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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