Fitch Ratings has affirmed Pena Verde, S.A.B.'s (PV) Long-Term Local Currency (LC) Issuer Default Rating (IDR) at 'BBB+'.

The Rating Outlook is Stable.

Key Rating Drivers

Rating Derived from Patria: PV's 'BBB+' LC IDR is derived by notching from the Insurer Financial Strength (IFS) rating of its main subsidiary, Reaseguradora Patria, S.A. (Patria), per Fitch criteria. PV's LC IDR is based on Fitch's view of Patria's IFS rating when considering only local currency risks. On such a basis, Fitch currently views Patria's international implied LC IFS rating as equivalent to the 'A-' level, and its implied LC IDR at 'BBB+'. Under Fitch criteria, in group solvency regulatory environments, as designated by Fitch in Mexico, the IDR of a holding company is set at the same level as that of the operating company.

Patria's published international IFS rating is 'BBB+', and is treated by Fitch as a foreign currency rating given its policy obligations volume in foreign currency. The implied LC ratings of Patria discussed above are applicable only in the PV notching exercise.

Company Profile Favorable Compared with LATAM peers: Fitch views PV's company profile as favorable compared with the Latin American insurance market. Founded in 2012, PV is the holding company of six subsidiaries. At YE 2022, PV's total assets from its main (re)insurance operating entities made up 96% of group's total assets; 75% through Patria and 21% through General de Seguros S.A.B. (General de Seguros) and subsidiary. With a global position and focus in Latin America, PV's net written premiums (NWP) and equity totaled USD620 million and USD661 million, respectively. The company has a strong franchise in the region, which allows for a very highly diversified business, with 79% of NWP in Latin America and Caribbean (40% in Mexico) and 21% overseas.

Adequate Capitalization and Leverage: PV's capital quality is adequate for the rating category. The entity's gross and net leverage ratios (2.1x and 1.7x at YE 2022, respectively) remain favorable. The group practices strong capital allocation policies, which include a solvency capital requirement ratio for Pena Verde.

Fitch's primary rating constraints include pressure on investments given the Mexican sovereign's related investments, which represents 102% of PV's equity at YE 2022. Fitch notes that premium growth given PV's strategic plan may affect net and gross leverage ratios relative to regulatory capital in the future. However, Fitch expects ratings subfactors to remain at the current rating category. While the company currently has no debt outstanding, the current rating assumes debt capacity of up to 30% of total adjusted capital.

Performance Pressed by Insurance Subsidiary: Fitch views PV's underwriting and overall profitability as adequate but pressured by General de Seguros' weaker financial performance along with volatility in financial results and operating expenses. Historically, PV's technical result has been positive. The combined ratio has consistently fallen below 100% (YE22: 96.8%; 3YA:97.1%), but is pressured by General de Seguros' losses. Fitch expects Pena Verde's financial performance assessment to be maintained at the current assigned rating in the absence of losses greater than expected in the entity's basis scenario.

Financial Profile Likely to Improve: Fitch believes PV's financial profile could be boosted by premium growth expectation in investment-grade-rated countries, which will potentially expand the entity's underwriting and investment diversification and reduce below-investment-grade exposure. However, such expansion comes with execution risks.

Adequate Reinsurance Program: PV's reinsurance utilization ratio is adequate as a result of its business model, which relies on retaining 82% of the business written to its ample base of clients. Reinsurance recoverable to capital was 43% at YE 2022.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade could be driven by a positive movement in Patria's implied Local Currency IDR.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade could be driven by a downgrade of Patria's rating or by a deterioration of PV's intrinsic financial performance, or by debt issuance that results in financial leverage ratio higher than 30%;

Negative Rating action could be triggered by persistent losses in the insurance business line that lead to a change in Fitch's view of the subsidiaries' strategic importance.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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