RPT-Fitch affirms SIRe's IFS at 'A-'; outlook stable

Tue Feb 25, 2014 5:15am EST

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Feb 25 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Swiss reinsurer SIGNAL IDUNA Rueckversicherungs AG's (SIRe) Insurer Financial Strength (IFS) rating at 'A-'. The Outlook is Stable.

KEY RATING DRIVERS

The rating reflects the benefits of SIRe's ownership by IDUNA Vereinigte Lebensversicherung aG fuer Handwerk, Handel und Gewerbe (IDUNA) group. SIRe is viewed by Fitch as "very important" to the IDUNA group under the agency's group rating methodology. SIRe's rating benefits from a two-notch uplift from its standalone assessment.

The company's rating also reflects its strong capitalisation, sound underwriting practices and strong growth in recent years. Offsetting rating factors include SIRe's small size and heightened operational risks, mainly emanating from its dependence on a small number of key staff. However, some key staff members that left in recent years have been successfully replaced.

SIRe's strong capitalisation is reflected by its regulatory solvency margin of 247% at end-2012 under the Swiss Solvency Test 2013. Fitch views this level of capitalisation as commensurate with the rating. Fitch regards SIRe's risk management, which is supported by the company's membership of the wider group, as strong for a company of SIRe's small size.

Fitch expects that SIRe's gross written premiums (GWP) increased by 3% in 2013. The company achieved a five-year compounded annual GWP growth rate of 6.9% for the period 2008-2012 and reported GWP of CHF153.2m in 2012. SIRe has maintained the combined ratio below 100% since 2009, which reflects its sound underwriting practices. Fitch expects SIRe's premium income to be stable in 2014 as some amendments on the existing block of business limited SIRe's growth potential in 2013 and will likely do so again in 2014.

Fitch believes that the IDUNA group is following a long-term strategy to develop SIRe into an integral and significant part of the overall group. This view is supported by the group's plans to expand SIRe's target markets after it has built up a sustainable base for its business. Group benefits include the allocation of a high core capitalisation of CHF150m. 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.

For life insurance, the agency views IDUNA's resilience to the current low investment yield environment as strong compared with that of the German life market as a whole. However, technical profitability continues to be constrained by the low interest rate environment. Fitch also views IDUNA's consolidated underwriting profitability in non-life as low in comparison with the German non-life market. Despite this, the IDUNA group achieved strong bottom-line profitability in 2012. The group achieved a strong return on equity of 11.7% in 2012 (2011: 10.2%). Fitch expects that the group maintained its improved financial profile in 2013 with a return on equity of at least 7%.

RATING SENSITIVITIES

Rating triggers for a downgrade include a reduction in SIRe's strategic importance to the IDUNA group and deterioration in IDUNA group's credit quality, in particular through a significant decrease in capitalisation. Any significant weakening of SIRe's credit profile could also lead to a downgrade, although Fitch views this as unlikely.

Fitch views an upgrade as unlikely in the near to mid-term. However, rating triggers for an upgrade include a substantial and sustainable increase in IDUNA group's capitalisation and improvement in the group's non-life combined ratio to a level consistently below 100% as well as an improvement in the operational performance of IDUNA's life insurance business.

IDUNA is a member of the German SIGNAL IDUNA group, which is headed by four mutual insurance companies. In 2012, the SIGNAL IDUNA group had total GWP of EUR5.5bn, total assets of EUR47.0bn and employed about 13,300 staff.

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