Fitch Ratings has upgraded France-based reinsurer SCOR S.E.'s (SCOR) Insurer Financial Strength (IFS) rating to 'AA-' from 'A+' and affirmed the Long-term Issuer Default Rating (IDR) at 'A+'. These actions also apply to the ratings of core operating subsidiaries. The Outlooks are revised to Stable from Positive.
Fitch has simultaneously affirmed SCOR's subordinated debt at 'A-', with the exception of the EUR350m junior subordinated debt (FR0010359687), which has been downgraded to 'BBB+' from 'A-'. A full list of rating actions is available at the end of this commentary.
The IFS upgrade reflects the development of SCOR's reinsurance franchise, the scale and diversity of which have improved significantly through external growth and swift integration of acquired operations, helping to generate a more stable level of profitability. Further support is provided by a level of capitalisation that Fitch considers to be very strong.
The IFS upgrade also follows the realignment exercise for reinsurers following the publication of recently updated notching criteria for the insurance sector which the agency published on 14 July 2015. This included an extensive peer review analysis of relative rating levels and followed publication of an exposure draft of proposed criteria on 12 May 2015. The updated notching criteria appear in Section VI of the insurance master criteria report 'Insurance Rating Methodology'.
KEY RATING DRIVERS
Fitch maintains a favourable view of SCOR's P&C reinsurance division, which has steadily grown into a well-diversified portfolio, both geographically and by line of business. The division is the major contributor to group operating earnings. In addition to diversification, a lower risk appetite than peers for, and exposure to catastrophe business, is expected to protect the reinsurer from the worst of any protracted period of price softening. SCOR's reported combined ratio improved to 91.5% in 2014 (2013: 93.9%), with no material reserve release.
Life reinsurance profitability remains resilient with a technical margin only slightly lower at 7.1% for 2014 (2013: 7.2%). Two major acquisitions in recent years have seen SCOR's life reinsurance business become a significant part of the group, at least in premium terms. Successful management of the in-force book, coupled with continued organic growth, is key to the division increasing its contribution to group profitability.
In the medium term the development and defence of SCOR's market position will depend on the reinsurer's ability to increase its share of key markets and reinsurance lines, in Fitch's opinion.
Fitch regards SCOR's capitalisation as very strong, based on a combined assessment of the agency's Prism factor based model (FBM) and manageable, if high, total financing commitments (TFC) ratio, which stood at approximately 1.1x in 2014 (2013: 1.2x). As an offset, the agency notes the higher proportion of 'softer' forms of capital present within the Prism FBM assessment. Although financial leverage (end-2014: 24.1%) is marginally above average when compared with the reinsurer's immediate peers, it remains consistent with the current rating level.
SCOR continues to pursue a conservative investment strategy focused on a tightly defined allocation to generally highly liquid assets, and gradually lengthening asset duration. The reinsurer has no exposure to peripheral European sovereign bonds.
The quality of SCOR's reserves and the consistency of approach that has been applied to reserving are viewed favourably by Fitch. Over a three- and five-year period Fitch views development experience as positive, with reserves generating a surplus on a regular basis. These indicators suggest a consistent and prudent reserving philosophy.
Fitch recognises that the current operating environment remains challenging for SCOR and the wider (re)insurance industry. Persistently low interest rates and increasingly intense competition, especially in non-life reinsurance, continue to drive price softening across certain major reinsurance classes. The agency expects SCOR's diversified business profile and prudent underwriting policy to provide resilience to a protracted period of price softening, should this occur.
RATING SENSITIVITIES
An upgrade is considered as unlikely in the near-term, but could be achieved over the longer-term if financial performance (including a run-rate combined ratio remaining below 93%) improves further, if SCOR's market position continues to strengthen relative to peers, and if the quality of SCOR's capitalisation improves, as assessed within Fitch's Prism FBM.
A downgrade may occur if financial leverage rises and remains over 25% or if the overall capitalisation assessment deteriorates to 'strong'. A combined ratio consistently above 100% could also lead to a downgrade.
FULL LIST OF RATING ACTIONS
SCOR S.E.:
IFS rating: upgraded to 'AA-' from 'A+'; Outlook revised to Stable from Positive
Long-term IDR: affirmed at 'A+'; Outlook revised to Stable from Positive
Senior unsecured debt: affirmed at 'A+'
Subordinated debt: affirmed at 'A-'
Junior subordinated debt: downgraded to 'BBB+' from 'A-'
SCOR Switzerland AG
IFS rating: upgraded to 'AA-' from 'A+'; Outlook revised to Stable from Positive
Long-term IDR: affirmed at 'A+'; Outlook revised to Stable from Positive
SCOR Holding (Switzerland) AG
Long-term IDR: affirmed at 'A+'; Outlook revised to Stable from Positive
The following SCOR entities' IFS ratings have been upgraded to 'AA-' from 'A+'. The Outlook has been revised to Stable from Positive:
SCOR Global P&C S.E.
SCOR Global Life S.E.
SCOR Canada Reinsurance Co
SCOR UK Co Ltd
SCOR Reinsurance Co (US)
General Security Indemnity Co of Arizona
SCOR Reinsurance Co Asia Ltd
SCOR Reinsurance Asia Pacific Pte Ltd
SCOR Global Life Americas Re Insurance Co
SCOR Insurance (UK) Ltd
Additional information is available on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub. 14 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868367
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988304
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988304
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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