French headquartered global reinsurance company SCOR SE has been upgraded to ‘AA-‘ from ‘A+’ by Standard & Poor’s, as the firm demonstrates “resilience to softening P/C reinsurance pricing” and has defended its market share.
Upgrades have been few and far between in reinsurance over the last year and S&P’s actions today perhaps underlines the advantageous position that the major globally diverse reinsurance group’s, like SCOR, enjoy.
These large global groups have diversified business strategies and an ability to secure preferential terms on reinsurance program signings, placing them in a position to outperform in what remains a very challenging market environment.
In upgrading SCOR today, S&P said; “The upgrade reflects our view that the group has demonstrated its very strong competitive position through resilience in pricing and technical profitability in its property/casualty (P/C) book and has reinforced its leading position in the U.S. life reinsurance market. SCOR continues to exhibit strong and stable earnings that should sustain extremely strong capital adequacy through 2017.”
S&P puts the success of the French reinsurer down to a prudent approach, discipline and its ability to withstand pricing pressure.
“We believe that the group has successfully withstood pricing pressures in the buyer’s market in the P/C reinsurance industry and has also been able to defend its market share in the consolidating reinsurance sector thanks to prudent risk management and pricing discipline,” S&P continued.
S&P also notes that SCOR has been able to successfully grow its book, despite the soft reinsurance market conditions, citing “a 10% increase in gross premium written and net income of €509 million in 2014.”
S&P expects SCOR will generate a return on equity of 9% to 10% from 2015 to 2017, a perhaps telling figure as it is below the longer term average that the large reinsurance companies have more typically sought to achieve.
Low double-digit ROE’s were more typical of these firms, but in the current environment and perhaps the new-normal of lower reinsurance returns, SCOR’s ability to generate close to 10% is seen as worthy of the upgrade anyway.
Interestingly, Fitch Ratings said the other day that a 10% average ROE across the reinsurance sector could be viewed as a boundary below which it may start to action negative rating movements, as it sees it as the level at which reinsurers meet their cost of capital.
So that would suggest that SCOR, while upgraded and clearly with some of the best prospects in the industry, will still only just be meeting its cost of capital, on an ROE basis.
Also worth noting is that the large reinsurance firms, like SCOR, have been increasingly putting their risk management to the test, as they seek to grow their books, taking on increasing amounts of risk but at lower pricing levels and with, in many cases, expanded terms.
How that trend pans out over the years to come, when losses return to more normalised levels remains to be seen. But it makes strong risk management a key trait for reinsurance companies going forwards, in our opinion.
Also worth considering, when thinking about rating upgrades in the currently challenging environment, is the fact that the way reinsurers manage catastrophe exposures has been diverging, at a time when net investment yields have dipped appreciably and we’re being warned that reserve releases may have been protecting profits for some reinsurers.
That all suggests that the difficult times are not passed, so rating upgrades should not encourage complacency.
Reinsurers are going to be watched closely by the rating agencies in the coming years, as they wait to see how the structural changes that the market has undergone play out. Upgrades are certainly a signal that the large, globally diverse reinsurer business model continues to be among the most preferable.
But as the trends play out it will be interesting to watch just how effectively these global players can sustain their returns on equity and ultimately profits for their shareholders, as the competition and challenges they face show no sign of declining.
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