Confianza Compañía Aseguradora de Fianzas SA€¦ · Moody's considers that Swiss Re Corporate...

FINANCIAL INSTITUTIONS

CREDIT OPINION11 August 2016

Update

RATINGSCompania Aseguradora de Fianzas SA Confianza

Domicile Colombia

Long Term Rating Baa2

Type Insurance FinancialStrength - Dom Curr

Outlook Stable

Please see the ratings section at the end of this reportfor more information.The ratings and outlook shownreflect information as of the publication date.

Contacts

Francisco Uriostegui [email protected]

Jose Angel Montano 52-55-1253-5722VP-Senior [email protected]

Diego Nemirovsky 54-11-5129-2627VP-Sr Credit [email protected]

Marc R. Pinto, CFA 212-553-4352Managing [email protected]

Compañía Aseguradora de Fianzas SAConfianzaSemiannual Update

Summary Rating RationaleCompañía Aseguradora de Fianzas S.A. CONFIANZA's (Confianza) Baa2 global local currency(GLC) insurance financial strength (IFS) rating is primarily based on the company's leadingand long-standing position in the Colombian surety industry, its solid profitability and itsadequate capitalization metrics. Confianza is a leading market participant in the Colombiansurety industry as one of the top 3 largest players. The company's profitability has beensolid over the last 5 years, with an average return on capital of 22%, which compares abovelocal and regional peers. Moody's considers that Swiss Re Corporate Solutions' (“SRCS”Aa3 stable IFS rating) enhances Confianza's franchise strength and improves its riskmanagement capabilities. Consequently, Confianza's rating considers a one-notch uplift fromits standalone credit profile, reflecting 51% ownership by Swiss Re Corporate Solutions, aswell as home office management oversight over local operations.

These strengths are offset by Confianza's high product concentration, high investmentsconcentration in Colombian assets, relatively small business scale when considered on abroader regional basis, and by Colombia's Baa-level insurance operating environment, whichencompasses both systemic and insurance market-developments considerations.

Credit Strengths

» Strong brand and leading position in the Colombian surety market

» Strong capital adequacy and profitability metrics

» Well-diversified and mostly investment-grade asset portfolio

» Ownership by and integration with Swiss Re Corporate Solutions

Credit Challenges

» Limited business and geographical diversification

» High exposure to domestic securities

» Weakening of profitability margins derived from increasing competition

» Colombia's moderate operating environment (Baa)

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1033242

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 11 August 2016 Compañía Aseguradora de Fianzas SA Confianza: Semiannual Update

Rating OutlookThe outlook for Confianza's rating is stable., reflecting that the company's credit fundamentals are not expected to change in themedium term

What to Watch For:

The close of the integration of Confianza into SRCS, that will allow the subsidiary to fully benefit from experience of parent's practice inother business segments.

Impact of increasing competition on profitability margins

Factors that Could Lead to an Upgrade

» Effective product diversification that reduces its exposure to one line of business and increase its competitive attributes

» Stronger explicit support from its parent in the form of full ownership, guarantee or keepwell agreement

Factors that Could Lead to a Downgrade

» Sustained decline of the company's market share and franchise strength

» Sharp deterioration of profitability, with sustained returns on capital below 10%

» Worsened capitalization metrics, with a sustained Gross Underwriting Leverage consistently above 4x

» Reduction of support from Swiss Re Corporate Solutions

» Deterioration in Colombia's government bond rating or the country's insurance operating environment



Key Indicators

Exhibit 1Starting in 2015, information shifted to International Financial Reporting Standards (IFRS) from Colombian accounting standards.

Source: Moody's Investors Service, based on company's financial statements

Detailed Rating ConsiderationsConfianza's Baa2 IFS rating is one notch above the adjusted stand-alone credit profile indicated by Moody's insurance financial strengthrating scorecard, reflecting the majority stake ownership and implicit support of the company by Swiss Re Corporate Solutions.

The company's stand-alone insurance financial strength rating scorecard (Baa3) reflects the insurer's limited diversification, the directinvestment exposure to Colombian domestic securities and the strong linkages between the sovereign and the surety industry.

Insurance Financial Strength RatingThe key factors currently influencing the rating and outlook are:

Business ProfileMARKET POSITION, BRAND AND DISTRIBUTION: Baa - STRONG PRESENCE IN THE COLOMBIAN SURETY BUSINESS

Confianza is the largest specialized surety insurer in Colombia, with a market share of approximately 14% based on gross premiumsas of December 31, 2015. Compared to the total surety industry considering non-specialized surety insurers, Confianza is among thetop 3 in the Colombian market which is relatively small business scale when considered on a broader regional basis. During 1Q2016,the market share dropped to 12% due to the seasonality of the business and strong underwriting discipline which focus in low riskexposures. We expect the company will be more focused on improve the underwriting results, instead to increase its market share.As result of the integration with SRCS, we see that the company is well positioned to further strengthen its local presence as part ofa strong international (re) insurer's expertise and resources. We expect Confianza to expand its business volume in the coming yearsunder the Colombian government's "4G" plan for infrastructure development. However, the high competition in Colombia's suretymarket can put strain on the company's margins. Confianza maintains a relatively high underwriting expense ratio compared to local



and global peers, although the percentage is in line with the average for mono-line surety companies, whose operations are primarilyfocused on loss mitigation, rather than indemnification. In our view, Confianza's rating factor is consistent with expectations at the Baalevel in line with unadjusted scorecard metrics.

PRODUCT FOCUS AND DIVERSIFICATION: Baa - HIGH CONCENTRATION, BUT ALSO PROVEN EXPERTISE IN SURETY

Confianza's book of business is highly concentrated in one single segment given its business orientation (surety business representedapproximately 80% of total gross premium written), as Confianza has specialized in this business historically. Surety products arehighly linked to government contracts, which could be impacted in the case of an economic downturn. The company is increasing itsproduct diversifications and developing new products. We consider the gradual entrance to new insurance business is not posing arisk in the short term because the exposure is being limited by the cession of the risks by reinsurance contracts, and would represent acredit positive when the retention rate for more profitable businesses increases in the next 5 years. We view Confianza's track recordof risk management in its core business and its specialization like is a positive consideration for this rating factor, which we see more inline with a Baa adjusted level, rather than the Ba level generated by the unadjusted scorecard.

Financial ProfileASSET QUALITY: Baa - INVESTMENT-GRADE PORTFOLIO WITH SIGNIFICANT EXPOSURE TO COLOMBIAN SECURITIES

At the end of 2015, Confianza's investment portfolio was highly concentrated in Colombian government securities (30% of totalinvestments, rated Baa2/stable) and about 50% in other fixed income instruments, mostly deposits in Colombian banks. Thecompany's investment portfolio reduced its exposure to equities in the 4Q2015 by monetizing its equity stock in Odinsa a largeColombian infrastructure company, resulting in a final exposure to equities in 1Q2016 of 5.5% of investment portfolio. Regarding theexposure to reinsurance recoverables have remained stable under NIIF comparable basis the average ratio for 2015-14 was 206%.Operations rely meaningfully on reinsurance, with a retention of about 50% of gross premiums. We expect that the retention willdecrease further in the future as the company writes commercial line businesses that are heavily dependent on reinsurance. As of4Q2015, goodwill and other intangibles accounted less than 3% of shareholders equity, which is very modest.

Overall, given the concentration of the company's investment portfolio in domestic fixed income securities rated in the Baa range(sovereign and bank assets), our adjusted score for this factor is at the Baa level, rather than the unadjusted A factor score indicated bythe scorecard.

CAPITAL ADEQUACY: Baa - OPERATING LEVERAGE IS RELATIVELY LOW COMPARED TO LOCAL PEERS

Confianza's sustained profitability and adequate investment quality has supported its capitalization metrics. The company's capitaladequacy metric, as measured by gross underwriting leverage (GUL), was 3.5x as of December 2015, which is in line with otherlocal surety insurers. We note that in 2015, GUL rose to 3.5x from 2.2x in 2014, given the implementation of International FinancialReporting Standards (IFRS) regards to the increase post additional reserves. We note that GUL for surety insurers is usually lower thanthat of P&C insurers, as the former are focused primarily on loss prevention and mitigation, rather than indemnification, promptinglower assets and reserves.

The company consistently maintains significant surplus capital above the minimum regulatory requirements USD 3.7 million, whichwe consider will remain in the coming years. However, we believe this measure does not adequately assess the multitude of thecompany’s assumed risks. Furthermore, Colombian surety companies do not hold specific contingency reserves, which would providefurther capital protection. Consequently, we consider Confianza's capital adequacy as being more in line with expectations at the Baalevel for this factor, rather than the Aa indicated by the unadjusted score.

PROFITABILITY: Baa - GOOD OVERALL PROFITABILITY, SUPPORTED BY SOUND UNDERWRITING RISK MANAGEMENT

Confianza has been profitable in recent years. The company has strengthened its underwriting systems and internal control before andduring the integration with SRCS, which has driven Confianza's solid financial performance. Also, the company's investment incomehas become a more important component of Confianza's profitability over the past few years, particularly at the end of 2015, whenproceeds from monetization of Odinsa's equity outperformed historical results. The company's 5-year average return-on-capital (ROC)was 22%, a strong metric derived from good investment returns and also supported by underwriting discipline resulting in a 5-year



average combined ratio of 96.4%. However, we see new market participants and growing competition will pose midterm challenges.Furthermore, given the volatility associated to the mono-line nature of the company, we view Confianza's profitability more in linewith expectations at the Baa level, rather than the Aaa level indicated by the unadjusted global metrics.

RESERVE ADEQUACY: Baa - COUNTER-GUARANTEES IN SURETY CONTRACTS MITIGATE UNDERWRITING AND CLAIMRISK

Moody's believes that Confianza has an adequate reserve position, consistent with the underwritten risk. Surety reserves are basedon companies' historical experience and actuarial estimated losses, as established by local regulation. In addition, the surety segmentrequires that collateral be held against contracts, which helps to mitigate losses. Colombian regulator has established new reserverequirements, such as Incurred But Not Reported Reserves (IBNR), which Confianza fulfilled with its own resources. Colombian insurersdo not currently publish loss development triangles, hence our standard loss-development metric for this factor is not available.However, we do not see any relevant indication of reserve inadequacy, and we consider its reserve adequacy to be consistent withexpectations at the Baa level.

FINANCIAL FLEXIBILITY: Baa - CAPPED BY COLOMBIA'S LOCAL CURRENCY BOND RATING

Currently, Confianza does not have any debt on its balance sheet. However, given the company's majority ownership by SRCS, ourscorecard metrics for Financial Flexibility are those of Swiss Re Group. Confianza's ownership by, and integration of operations withSRCS would is a positive consideration for this factor, as being part of an important global (re)insurer could be beneficial for Confianza'saccess to capital markets, if necessary. However, Moody's considers the company's intrinsic financial flexibility to be constrained on astand-alone basis. Moreover, this factor is capped by Colombia's' local currency sovereign bond rating (Baa2), reflecting the modestdegree of development of the capital markets in the country and, as a consequence, Confianza's limited current ability to raise debt andequity on its own.

OPERATING ENVIRONMENT: Baa - MODEST PENETRATION OF INSURANCE IN COLOMBIA'S ECONOMY, BUTSUPPORTED BY HIGH INSTITUTIONAL STRENGTH

In addition to the company's own business and financial fundamentals, Moody's considers Colombia's operating environment inarriving at our final rating indication for the company. Our overall Baa-level insurance operating environment score, which carriesa 20% weight in the scorecard, is based on a Baa-range score for systemic risk (reflecting consideration of Moody's Sovereign Riskgroup's assessment of the country's economic strength (high-), institutional strength (moderate+) and susceptibility to event risk(moderate-) and a B-range score for insurance market development (reflecting consideration of the very low degree of penetration ofinsurance in the Colombian economy and per capita insurance utilization in comparison with other countries worldwide). Overall, inour view, the country's Baa-level operating environment exerts a minor influence on the Confianza's overall credit profile.

Other ConsiderationsOwnership and supportConfianza benefits from the ownership and support of SRCS, as well as from the overall support and strategic commitment of itsultimate parent company - SWISS RE Ltd. This support is evidenced by the brand sharing, control, and oversight of Confianza fromSwiss Re Group. The combined implicit and explicit parental support results in a one-notch uplift from Confianzas' Baa3 stand-alonecredit profile, resulting in a Baa2 insurance financial strength rating for Confianza.



Rating Methodology and Scorecard Factors

Exhibit 2Starting in 2015, information shifted to International Financial Reporting Standards (IFRS) from Colombian accounting standards.

Source: Moody's Investors Service based on company's financial statements

Ratings

Exhibit 3Category Moody's RatingCOMPANIA ASEGURADORA DE FIANZAS SACONFIANZA

Rating Outlook STAInsurance Financial Strength Baa2

SWISS RE CORPORATE SOLUTIONS LTD

Rating Outlook STAInsurance Financial Strength Aa3Subordinate A2 (hyb)

Source: Moody's Investors Service



© 2016 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ("MIS") ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDITRISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'SPUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKESECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANYESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKETVALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICALFACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHEDBY MOODY'S ANALYTICS, INC. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDITRATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDITRATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGSAND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY ANDEVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

MOODY'S CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FORRETAIL INVESTORS TO USE MOODY'S CREDIT RATINGS OR MOODY'S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACTYOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW,AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTEDOR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANYPERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.

All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as wellas other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information ituses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However,MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody's Publications.

To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for anyindirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use anysuch information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses ordamages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of aparticular credit rating assigned by MOODY'S.

To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatorylosses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for theavoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents,representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCHRATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.

Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (includingcorporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any rating,agreed to pay to Moody's Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintainpolicies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO andrated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually atwww.moodys.com under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's InvestorsService Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intendedto be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, yourepresent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly orindirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion asto the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be recklessand inappropriate for retail investors to use MOODY'S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or otherprofessional adviser.

Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody'sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it feesranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1033242

Confianza Compañía Aseguradora de Fianzas SA€¦ · Moody's considers that Swiss Re Corporate...

Documents

Transcript of Confianza Compañía Aseguradora de Fianzas SA€¦ · Moody's considers that Swiss Re Corporate...