Fitch Ratings has affirmed Monticello Insurance Limited's (MIL) Insurer Financial Strength (IFS) rating at 'BBB' with a Stable Outlook.

Key Rating Drivers

Support Driven Rating: Monticello Insurance Limited's IFS rating is driven by expected support from its ultimate parent Vale S.A. (Vale; Long-Term Local Currency Issuer Default Rating BBB/Stable). MIL is wholly owned by Vale Holdings B.V. (VHBV), which in turn is 100% owned by Vale.

Core Captive Insurer: Fitch considers MIL a core captive of Vale, and therefore equalizes the ratings. This is because the insurer's mission and goals are tied to Vale's risk management and risk financing strategy. All of MIL's business is derived from the parent, and the insurer is not viewed as a profit center. Its objective is to improve Vale's efficiency and to support efforts to optimize the operational and financial activities.

Parental Financial Commitment: Vale provides financial support to MIL in various forms. As the parent, it has given parental guarantees to letters of credit (LOCs) written by MIL to fronting insurers and provided timely capital injections when needed. The last major injection was USD241 million in 2012 and 2013. Since then, there has been no need for such support.

Volatile Profitability: MIL's profitability has been volatile since 2013 due to large oscillations in loss ratios. Administrative expenses and acquisition costs were broadly stable in this period. MIL's financial income from investments is a meaningful and stable source of earnings.

Adequate Capitalization, Low Leverage: MIL's capitalization remains strong and leverage is quite low. Capitalization and leverage ratios could be negatively affected by potential large losses, but Fitch believes parental support would be forthcoming if needed.

Conservative Investment Strategy: The main investment is in the form of an uncommitted revolving inter affiliate loan facility to VHBV, which can be redeemed in the short term, and the rest is mainly held in cash. As of December 2021, MIL's loans to parent made up 73% of quick assets, with the balance being held as cash at international banks outside of Barbados.

Technical Reserve Policies Follow Local Requirements: The company's pricing and reserve calculations were periodically reviewed by a third-party actuarial group, Marsh Canada. Reserve calculations are vetted by MIL's main fronting companies, and the company is fully integrated with the global risk management function of the Vale group.

Good Quality Reinsurance Programs: MIL's retention ratio, or net earned premium/gross earned premiums was 75.4% in December 2021. The insurer is protected from extremely large losses through reinsurance contracts. The large contracts are well diversified across an adequate number of mostly 'A-' rated reinsurers or above.

RATING SENSITIVITIES

MIL's IFS rating would be affected by changes in Vale's ratings or in Fitch's assessment of MIL as a core captive insurer of Vale.

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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