Mapfre downgraded over geographic risk concerns

Mapfre Group’s issuer credit ratings have been downgraded to “a” from “a+” by AM Best Co due to its geographic concentration of risk which exposes it to frequent and severe weather-related events.

The ratings agency affirmed Mapfre Re’s financial stength rating of A (Excellent) and removed all ratings from under review with negative implications and assigned a negative outlook.

The rating actions follow AM Best Europe - Rating Services Ltd’s downgrading of the ICR to “a” from “a+ of Mapfre’s affiliate company, Mapfre Re, a subsidiary of Mapfre SA, the ultimate holding company of Mapfre. They reflect Mapfre SA’s exposure to the continuing negative developments related to the eurozone sovereign debt crisis through sizeable exposures to peripheral eurozone debt.

Best said that Mapfre RE and Mapfre SA faced higher country risk due to the deterioration of Spain’s sovereign creditworthiness, whose debt accounts for 53% of the consolidated group’s 38bn euros invested assets at year-end 2011, the majority of which is derived from investments in government and financial institutions.

The ratings agency said that Mapfre SA also maintained sizeable commercial property investments in Spain through its investment holdings. Spain remains the main profit centre for the consolidated group, with approximately 40% of its consolidated gross written premiums and 60% of insurance results derived from its core market. Although the consolidated group enjoys a well spread geographically diversified portfolio, particularly in Latin America and the US, the majority of its business comes from countries with sovereign creditworthiness equal to or lower than Spain, said Best.

Best said negative rating actions could occur if Mapfre SA incurred a weakening in its risk-adjusted capitalisation, which is tied to investment losses or a deterioration occurs in the operating environment of its key territories.

The ratings assigned to Mapfre reflect its excellent capitalisation, strong operating performance, through solid investment income and consistently profitable underwriting results, established market presence within Puerto Rico and strong risk management practices, said Best. The ratings also recognise Mapfre’s solid brand name and its integral role as a member of Mapfre SA.

Partially offsetting these positive rating factors was Mapfre’s geographic concentration of risk, which potentially exposes its capital to frequent and severe weather-related events. Operating almost exclusively within Puerto Rico, the company’s operating results remain exposed to potential changes within the judicial, regulatory and economic climate, said Best. The negative outlook is driven by the rating agency’s concern that Mapfre SA has “exposure to continuing negative developments regarding the eurozone sovereign debt crisis given its sizeable exposures to peripheral eurozone debt”.

The positive rating factors reflected Mapfre management’s conservative underwriting philosophy and comprehensive reinsurance programme, which protect surplus from potential shock losses while enhancing the stability of earnings, said Best. It added that the management remained conservative in establishing reserve estimates as evidenced by favourable calendar year reserve development over the long-term.