November 29, 2017 / 1:52 PM / a year ago

Fitch Affirms Credendo Single Risk at IFS 'A-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, November 29 (Fitch) Fitch Ratings has affirmed Credendo Single Risk Insurance AG's (CSR) Insurer Financial Strength (IFS) rating at 'A-'. The Outlook is Stable. KEY RATING DRIVERS The rating reflects Fitch's view of the strong probability of support for CSR from its parent, the Belgian state-owned credit insurer Credendo Export Credit Agency (CECA, formerly: Delcredere Ducroire, ONDD). Fitch views CSR as strategically 'very important' to Credendo Export Credit Agency, under its insurance rating methodology. However, in its analysis Fitch has identified potential external barriers for CECA providing timely support to CSR, which has led to the uplift provided to CSR's standalone credit assessment of 'BBB-' being capped at three notches. CSR is a specialist insurer/reinsurer of commercial and political risks (single risks) in emerging markets and is 95.6%-owned by CECA. It had an estimated market share of 0.5% based on total 2016 gross written premiums in the single risk business. Fitch considers CSR's insurance portfolio is concentrated to single obligors, although the aggregate exposure is relatively well diversified by regions and industry sectors. Large single obligor limits (in excess of EUR10 million) represented about 31% of CSR's aggregate limits at end 1H17. CSR benefits from operational synergies with the Credendo Group, such as IT and accounting support, access to a wider range of international clients, and reinsurance agreement with the parent. Since January 2017, it has also shared the same brand as the parent organisation and the broader Credendo group. Fitch views CSR's capitalisation as adequate, based on CSR's multiple of nominal net credit exposure to equity. CSR's Solvency II (S2) ratio fell to 132% at end-2016 (2015:181%) following the impact of a large annual net loss. The ratio somewhat recovered in 1H17. Fitch notes that CSR's S2 ratio is subject to volatility driven by concentration risks in the insurance portfolio. CSR has no debt in its capital structure. Its available capital entirely consists of shareholders equity. Fitch views CSR's reinsurance protection as key in maintaining the long-term solvency of the single risk business given CSR's modest standalone risk-taking capacity. The reinsurance programme is a combination of quota share, excess of loss and stop loss treaties. Fitch expects CSR's reinsurance programme to remain robust and provide adequate protection against both claims frequency and severity. Fitch views CSR's profitability inherently volatile driven by potential large risk concentrations in the portfolio and its focus on emerging markets. However, this is somewhat mitigated by strong reinsurance protection. CSR's underwriting result is highly sensitive to recessionary economic events through a sudden increase in claims frequency and severity. CSR's Fitch calculated net combined ratio deteriorated to 147% (2015:106%) driven by a peaking loss ratio. Fitch believes CSR's reserving practices are prudent and reserve calculations are in line with local and S2 requirements. However, due to the high volatility in claims and potential single obligor concentrations, development triangles suggest relatively low unexpired risk reserve (now IBNR) compared with the actual loss experience. CRITERIA VARIATION ANALYSIS Fitch's approach to group support is set out under the Group Rating Methodology section of Fitch's Insurance Rating Methodology Criteria, which reflects the subsidiary's strategic role in the group. Fitch has identified CSR's role in the group as 'Very Important', which means its rating may benefit from the group credit assessment. However, this benefit is capped by the fact that the ability of support to flow to the subsidiary is limited by EU state aid rules. Fitch also considers that a group assessment cannot be identified with CECA's IFS rating because this rating benefits from a guarantee from the Belgian government. Therefore, Fitch has varied its criteria to use the guaranteed parent's credit rating as the anchor, but the standalone assessment of CSR is uplifted by three notches to align it with the credit profile of the CECA group, where the guarantee is not taken into account. RATING SENSITIVITIES The rating could be downgraded if CSR's capital position deteriorates, as measured by a material decline in the S2 ratio, or a large annual net loss. The rating could be upgraded if the volatility in CSR's earnings reduces and underwriting and net performance becomes more stable on a sustained basis. Contact: Primary Analyst Andras Sasdi Associate Director +44 20 3530 1805 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Stephan Kalb Senior Director +49 69 768076 118 Committee Chairperson Federico Faccio Senior Director +44 20 3530 1394 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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