Fitch Ratings has revised Swiss reinsurer Signal Iduna Rueckversicherungs AG’s (SIRe) Outlook to Stable from Negative and affirmed its Insurer Financial Strength (IFS) rating at ‘A-‘.
The revision of the Outlook to Stable reflects the improved business profile of SIRe’s ultimate parent company Iduna Vereinigte Lebensversicherung aG fuer Handwerk, Handel und Gewerbe (IL), based in Germany. After IL had fallen short of the German life insurance market growth several years in a row, it developed above the market average in terms of gross written premiums (GWP) and new business in 2010.
The affirmation of SIRe’s rating reflects strong capitalisation, prudent reserving, and sound underwriting practices. SIRe benefits from strong support from its membership within the IL group, and is viewed by Fitch as “very important” under the agency’s group rating methodology. Due to its small number of employees, SIRe faces significant operational risks, mainly with regard to key-staff risk.
Under its standard notching criteria, Fitch equalises Issuer Default Ratings (IDR) and IFS Ratings for reinsurance entities reflecting the absence of priority for reinsurance policyholders in a default situation. For SIRe’s rating, Fitch has deviated from this approach in favour of the application of standard notching for primary insurers where IFS ratings are typically notched above the IDR to reflect policyholder priority in a default. Fitch has assumed higher policyholder recoveries in this case, based on the significant internal group business written by SIRe, the small size of the reinsurer relative to the group and the expectation that, in case of need, parental support would be forthcoming.
SIRe’s strong capitalisation is reflected by the fact that it achieved around 284% in the Swiss solvency test for 2011. Fitch views this level of capitalisation as appropriate given the company’s small size. The agency also takes a positive view of SIRe’s diversification efforts. Fitch views SIRe’s risk management as strong relative to its size.
Fitch believes that IL group is following a long-term strategy to make SIRe an integral and significant part of the overall group. Group benefits include the allocation of a high core capitalisation of CHF100m. The agency expects IL group to inject another CHF25m during 2011. Fitch believes parental support would be available for SIRe in a stress scenario. SIRe also benefits from organisational and IT support from the parent company, and from the group’s relationship with European mutuals, which form the main part of SIRe’s customer base.
IL group was able to achieve financial results in line with and better than the agency’s expectations in 2010. Fitch views IL’s resilience against the current low interest yield environment as better than market average. However, technical profitability is suppressed by the current yield rates.
Fitch notes that an upgrade of the rating is unlikely in the near to mid term. However, a substantial increase in capitalisation and improvement in the group’s combined ratio as well as in the operational performance in life insurance could lead to an upgrade of SIRe’s rating. A deterioration in IL group’s credit quality, in particular a significant decrease in capitalisation, could lead to a downgrade.
IL is a member of the German Signal Iduna group (SI group), which is based in Dortmund and Hamburg. SI group is headed by four mutual insurance companies. In 2010, SI group had total GWP of EUR5.6bn, total assets of EUR43.9bn and employed about 13,000 staff.
Source : Fitch Ratings Press Release
