TEXT-S&P revises La Societe Hospitaliere d'Assurance Mutuelle outlook to neg

Wed Dec 12, 2012 10:21am EST

Overview
     -- Low interest rates and volatile financial markets continue to weigh on 
La Societe Hospitaliere d'Assurance Mutuelle's (SHAM) already weak risk-based 
capital adequacy. 
     -- In addition, we see increasing pressure on prospective earnings and 
financial flexibility stemming from higher competition in the medical 
liability business, which reduces SHAM's ability to implement rate increases 
when needed.
     -- Consequently, we are revising our outlook on SHAM to negative from 
stable, and affirming our 'BBB' long-term ratings on the company.
     -- The negative outlook reflects the possibility that we could downgrade 
SHAM if it is unable to restore its risk-based capital adequacy to a level 
more commensurate with the current rating. 


Rating Action
On Dec. 12, 2012, Standard & Poor's Ratings Services revised to negative from 
stable its outlook on French mutual insurer La Societe Hospitaliere 
d'Assurances Mutuelles (SHAM). At the same time, we affirmed our 'BBB' 
long-term counterparty credit and insurer financial strength ratings on SHAM.

Rationale
The outlook revision reflects our view that low interest rates and adverse 
financial markets will continue to constrain SHAM's risk-based capital 
adequacy over the medium term absent restorative management actions. The 
impact of increasing competition in the French medical liability business on 
the insurer's prospective earnings also weighs negatively on the ratings.

SHAM's risk-based capital adequacy is more sensitive than peers' to interest 
rate movement and financial market volatility, given the long-term nature of 
its liabilities and its still-high, albeit reducing, exposure to market risk. 
We believe that SHAM's capital adequacy will likely remain constrained in the 
medium term owing to low interest rates. That said, we expect capital 
requirements for asset and liability risks to slightly reduce, as the company 
de-risks its asset allocation to a degree while premium volumes stagnate. 

SHAM's operating performance and financial flexibility benefited from its 
ability to implement rate increases in recent years, in response to the 
long-term increase in frequency and average cost of bodily injury claims, and 
thanks to low competition in its area of expertise. We believe that increasing 
competition in the French medical liability business could weaken SHAM's 
earnings by weighing on its technical margins, particularly in the more 
competitive private clinics sector. In addition, SHAM's financial flexibility 
relies on tariff increases more than its peers', given its already high use of 
reinsurance and leveraged balance sheet. Therefore, we believe that SHAM's 
more limited pricing power has a negative impact on its financial flexibility.

Our financial strength ratings on SHAM continue to reflect its leading 
position and strong expertise in its historical niche market of medical 
liability insurance for French public hospitals. Operating performance also 
sustains the final ratings, mirroring our view of good earnings over the 
cycle, sustained by prudent reinsurance and conservative reserving practices. 
In particular, positive reserve surpluses over the last two years, thanks to 
the rapid decrease in ultimate losses in early claims development years, 
sustain the insurer's positive bottom line results. We expect the net combined 
ratio to progressively increase to the mid-90s over the next two years, but to 
remain below 110% through the cycle. According to our estimates, we expect 
SHAM to post positive net incomes in the EUR15 million-EUR20 million range over 
that period. 

Outlook
The negative outlook reflects our view that low interest rates and volatile 
financial markets will continue to constrain SHAM's risk based capital 
adequacy, and that increasing competition in the French medical liability 
business could weaken SHAM's earnings and financial flexibility.

We could lower our ratings on SHAM if:
     -- Its risk-based capital adequacy doesn't improve to a level more 
commensurate with a 'BBB' rating, either through stronger internal earnings 
generation or restorative management measures; or
     -- Earnings deviate significantly from our base-case expectations and the 
insurer loosens its conservative policy on reserving practices. 

Conversely, we could revise the outlook to stable if SHAM's capitalization 
improves, earnings meet our abovementioned expectations, and the insurer 
maintains its good competitive position in its niche market. 

Related Criteria And Research
     -- Interactive Ratings Methodology, April 22, 2009
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Refined Methodology And Assumptions For Analyzing Insurer Capital 
Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 


Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
La Societe Hospitaliere d'Assurances Mutuelles
 Counterparty Credit Rating
  Local Currency                        BBB/Negative/--    BBB/Stable/--
 Financial Strength Rating
  Local Currency                        BBB/Negative/--    BBB/Stable/--



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.