Research Update: Qualitas Compania de Seguros And Two Affiliates Ratings Raised; Outlook Stable Primary Credit Analyst: Nicolas D Lara, Mexico City 541148912161; nicolas.lara@spglobal.com Secondary Contact: Jesus Palacios, Mexico City; jesus.palacios@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 2, 2016 1
Research Update: Qualitas Compania de Seguros And Two Affiliates Ratings Raised; Outlook Stable Overview We revisited our views of the importance of enterprise risk management to Mexico-based insurer Qualitas Compañia de Seguros in light of the complexity of risks it's exposed to and the company's practices in this area; as a result, we now consider the ERM importance to the company to be 'Low.' We raised our national-scale long-term counterparty credit and financial strength ratings on Qualitas to 'mxaa+' from 'mxaa' and affirmed the 'mxa-1+' short-term rating. At the same time, we raised our global-scale ratings on affiliates Qualitas Controladora S.A.B. de C.V. (QualCon) and Qualitas Insurance Co. (Quic) one notch to 'BB+' and 'BBB-', respectively. The stable outlook reflects our expectation that Qualitas will maintain both its leadership position in the Mexican auto insurance business and adequate operating performance, despite rising competition; the outlook on QualCon and Quic parallels the outlook on Qualitas. Rating Action On May 2, 2016, S&P Global Ratings raised its national-scale long-term counterparty credit and financial strength ratings on Qualitas Compania de Seguros S.A. de C.V. y Subsidiarias (Qualitas) to 'mxaa+' from 'mxaa' and affirmed the 'mxa-1+' short-term rating. At the same time, S&P Global Ratings raised its global-scale long-term counterparty credit rating on Qualitas Controladora S.A.B. de C.V. (QualCon) to 'BB+' from 'BB'. In addition, we raised our counterparty credit and financial strength ratings on Qualitas Insurance Co. (Quic), Qualitas' U.S.-based subsidiary, to 'BBB-' from 'BB+' based on our view that this is a 'Highly Strategic' subsidiary for the group. The outlook on all of these companies is stable. Rationale The rating action on Qualitas and related entities reflects our revised view of the importance of enterprise risk management to Qualitas in light of complexity of risks it's exposed to and the company's practices in this area. We revised our assessment of the importance of ERM to Qualitas to 'low' from 'high' importance because we believe the company is not exposed to complex risks that could cause a significant loss of capital and earnings in a short period of time or that are highly uncertain or long-term in nature. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 2, 2016 2
The ratings on Qualitas continue to be supported by its strong brand recognition, leadership position in the Mexican auto insurance market, and adequate operating performance. However, its current risk-based capital is only slightly redundant in our 'BBB' benchmark, and there are uncertainties regarding the company's capitalization levels after the implementation of the local regulator's Solvency II-type capital model, which are limiting rating factors. The ratings reflect our view of Qualitas' "satisfactory" business risk profile and "lower adequate" financial risk profile. QualCon is a non-operating holding company and the parent of Qualitas. Our rating on QualCon follows our group rating methodology and standard notching for non-u.s., non-operating holding companies. As a result, the rating on QualCon is two notches below the group credit profile (GCP), as the insurance group has no banking or significant non-regulated businesses. The rating differential incorporates the ongoing subordination of QualCon's creditors to those of the policyholders of Qualitas. Quic is an affiliate of Qualitas and operates in the U.S. by offering mainly cross-border products to Qualitas' clients. Our ratings on Quic follow our group rating methodology and standard notching for "highly strategic" subsidiaries. As a result, the ratings on Quic are one notch below Qualitas' GCP. We view Quic as a "highly strategic" subsidiary due to the parent's strong level of support and commitment and Quic's high level of integration with respect to business strategy and enterprise risk management (ERM). In addition, we believe there is a close link between Quic and the group's reputation and that the subsidiary will benefit from the ongoing business of its parent and affiliate in Mexico. Overall, Qualitas faces intermediate industry and country risks because its activities and underwriting are based mostly in Mexico. Our Insurance Industry Country Risk Assessment (IICRA) for Mexico's property/casualty (P/C) insurance sector indicates an intermediate risk. Our country risk score is based on Mexico's economic, political, and financial system risks, which stem from our sovereign criteria for the first two risks and our Banking Industry Country Risk Assessment (BICRA) criteria for the last one (see "Banking Industry Country Risk Assessment: Mexico," published Aug. 28, 2015). Our P/C industry risk assessment considers overall potential risks arising from catastrophes as relatively high as a result of the country's propensity for natural disasters. Entry barriers into Mexico's P/C segment are moderate, in our view. Still, there is plenty of room for growth because insurance penetration is still very low in Mexico at about 2% of GDP. We believe domestic regulatory oversight and its track record are effective, and it has fostered satisfactory market performance over the past several years. In addition, the regulator adequately monitors the entire industry frequently. We regard Qualitas' competitive position as adequate, supported by its positive brand recognition, leadership position in the motor segment, and adequate operating performance. Qualitas has increased its market share in the motor segment to 25.3% in 2015 from 24.9% in 2014. In addition, the company has maintained adequate operating performance over the past few years despite WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 2, 2016 3
strong competition in terms of pricing and service. Qualitas' combined ratio continues to compare favorably with that of its peers and the industry. The company reported a 99.8% property/casualty combined ratio as of the end of 2015, slightly better than the 101.4% average for its peers (AXA, ABA, GNP, MAPFRE, ATLAS, HDI, and Zurich Santander). We expect that Qualitas' operating performance will continue to be slightly better than its industry peers' over the coming years given its market leadership and focus in the motor segment. In our base-case scenario, we forecast the combined ratio improving to 97%-98% in the next 12-24 months. We also take into account that Qualitas' monoline business profile is focused on the motor segment, which partially weakens its credit profile compared with that of multiline insurers operating in Mexico, as its business profile is less diversified. We expect the company to continue to focus its efforts developing the Mexican motor segment. We consider the capital and earnings of Qualitas as 'upper adequate,' reflecting capital adequacy that is slightly below our 'BBB' benchmark per our risk-based capital model. We incorporate into our base-case scenario that the company's capital management will still be somewhat aggressive with a relatively low regulatory capital adequacy ratio. At the moment, the company follows a dividend policy that considers paying out capital in excess of 1.5x the minimum regulatory capital requirement; it was 1.3x as of December 2015. We also expect that the company will pay dividends if the regulatory capital requirements decrease after the regulator's Solvency II-type capital model is fully implemented and results are certain. In terms of profitability, the company reported net income of 621 million Mexican pesos (MXN), reflecting an ROE of 15.22% for 2015 (a five-year average of 28.3%). For 2016-2017, we expect the company to report an average ROE of 15.8% and an average ROR of 5.6%, supported by its pricing power, leadership in the motor businesses, and tight cost-control strategy. We regard Qualitas' risk position as moderate, limited by the company's concentration in the motor segment, which, in our opinion makes it more vulnerable to adverse events than its peers that operate in multiple segments. However, Qualitas has very low exposure to exchange risk and doesn't have significant concentrations in its investment portfolio. In our opinion, Qualitas' financial flexibility is adequate. The company has access to diverse sources of capital and very low reinsurance utilization, unlike many of its domestic peers. QualCon is a publicly listed company, which could allow it to issue capital in the public market, unlike others peers in Mexico. The company could increase its reinsurance utilization if necessary. We view Qualitas' ERM as adequate. In our opinion, ERM controls are in place and cover most of the company's risks. We revised our assessment of the importance of ERM to Qualitas to low from high importance because we believe the company is not exposed to complex risks that could cause a significant WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 2, 2016 4
loss of capital and earnings in a short period of time or that are highly uncertain or long-term in nature. The company writes only auto business and has a long, successful track record. We view its risk-management culture, risk controls, emerging risk, and strategic management as adequate. We believe the company's strategy in the past few years has allowed it to deliver satisfactory operating performance. We regard Qualitas' management and governance as fair. In general, we consider planning and strategy execution at Qualitas to be effective, which has improved its operating performance. The company has started a succession plan for the top executive team and has broadened the management team. However, we still consider the company to have a high risk tolerance, a track record of aggressive capital management, and a relatively high dividend payout ratio, though the company maintains capitalization levels slightly below our 'BBB' ratings benchmark. In our view, Qualitas' liquidity is strong because of its sound credit quality, liquid investments, and regular premium and investment income inflow. Currently, Qualitas has no debt obligations covenants or other requirements that could compromise its liquidity. Outlook The outlook on Qualitas reflects our expectation that the company will maintain its leadership position in the Mexican auto insurance market and that the rating fundamentals--including operating performance and capital adequacy levels--will remain at the current levels, considering a combined ratio in the 97%-98% range and risk-based capital close to our 'BBB' rating category over the next two years. The stable outlook on both QualCon and Quic parallels Qualitas' outlook. Downside scenario We could downgrade Qualitas over the next two years if the company's capital falls below our expectations, Qualitas implements an aggressive dividend policy eroding capitalization levels over time, or if the company's operating performance weakens as a result of aggressive underwriting or adverse market conditions. In addition, a significant contraction in the auto insurance market may undermine Qualitas' financial or operating performance. Upside scenario Another upgrade is possible over the next two years if Qualitas strengthens its capitalization ratios to levels consistently above our benchmark for the 'BBB' levels and the company maintains sound risk management practices with adequate operating performance. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 2, 2016 5
Ratings Score Snapshot To From Holding Company Rating BB+/Stable/-- BB/Stable/-- Business Risk Profile Satisfactory Satisfactory IICRA* Intermediate Risk Intermediate Risk Competitive Position Adequate Adequate Financial Risk Profile Lower Adequate Lower Adequate Capital & Earnings Upper Adequate Upper Adequate Risk Position Moderate Risk Moderate Risk Financial Flexibility Adequate Adequate Modifiers 0-1 ERM and Management 0-1 Enterprise Risk Management Adequate Adequate Management & Governance Fair Fair Holistic Analysis 0 0 Liquidity Strong Strong Support 0 0 Group Support 0 0 Government Support 0 0 Related Criteria And Research Related Criteria Standard & Poor's National And Regional Scale Mapping Tables, Jan. 19, 2016 National And Regional Scale Credit Ratings, Sept. 22, 2014 Group Rating Methodology, Nov. 19, 2013 Enterprise Risk Management, May 7, 2013 Insurers: Rating Methodology, May 7, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research Mexico's Property And Casualty Insurance Sector Carries An "Intermediate" Insurance Industry And Country Risk Assessment, Oct. 21 2015 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 2, 2016 6
Ratings List Ratings Raised To From Qualitas Compania de Seguros, S.A. de C.V. y Subsidiarias Long-Term Counterparty Credit Rating CaVal (Mexico) National Scale mxaa+/stable mxaa/stable Financial Strength Rating CaVal (Mexico) National Scale mxaa+/stable mxaa/stable Qualitas Controladora S.A.B. de C.V. Counterparty Credit Rating BB+/Stable/-- BB/Stable/-- Qualitas Insurance Co. Counterparty Credit Rating Local Currency BBB-/Stable/-- BB+/Stable/-- Financial Strength Rating Local Currency BBB-/Stable/-- BB+/Stable/-- Rating Affirmed Qualitas Compania de Seguros, S.A. de C.V. y Subsidiarias Short-Term Counterparty Credit Rating CaVal (Mexico) National Scale mxa-1+ Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 2, 2016 7
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