Financial assessment: Fitch maintains its favor with SCR

Financial assessment: Fitch maintains its favor with SCR

Fitch Ratings confirms the financial strength (IFS) of the Central Reinsurance Company (SCR), at “AAA”. The national operator, a subsidiary of CDG, also presents stable prospects.

Despite the gloomy economic climate, the Central Reinsurance Company (SCR) is performing well. This is confirmed by the international rating agency Fitch in its recent note on the Moroccan reinsurer. Indeed, Fitch confirms the financial soundness rating (IFS) of the SCR at “AAA” and affirms, at the same time, that this rating reflects in this case “the reinsurer’s ownership and exposure to sovereign debt, its strong capital position, robust financial performance, and adequate provisioning and reinsurance practices”.

In its note, Fitch recalls that the rating of the SCR benefits from the unlimited guarantee issued by the Moroccan State (BB+/Stable), and this, on its domestic activity. This point represents a solid basis in the context of the assessment of the company’s profile, compared to its local peers, believes the rating agency. At the same time, the company is gradually increasing its international diversification, as evidenced by the share of gross premiums written internationally, which represents 25% in 2021, compared to 22% in 2018. However, Fitch believes that the growing international presence of the reinsurer does not necessarily result in a substantial weakening of its credit profile.

An investment strategy cautious
Furthermore, Fitch has also assessed SCR’s exposure to investment risk, which it considers to be high. This assessment is reflected in an asset-to-risk capital ratio reaching 283% at the end of 2021, and 288% at the end of 2020. The agency indicates that this “is mainly explained by a significant exposure to government or government-guaranteed bonds , which are fully taken into account in the ratio, in accordance with the guidelines of the Fitch criteria”. That said, the agency considers the company’s investment strategy to be conservative compared to its domestic peers.

A solvent reinsurer
Furthermore, according to the model based on the Fitch prism factor, the CDG subsidiary obtained a “very solid” rating at the end of 2021, similar to that obtained at the end of 2020. Thus, the company remains compliant with the regulatory requirements of national solvency. This is precisely demonstrated by the Solvency-I type regulatory ratio, which is 214% in 2021, whereas it was 209% in 2020 and 227% in 2019, including unrealized capital gains. In addition, the agency claims that SCR’s Solvency-2 (S2) type ratio, calculated internally and certified by a firm of internal actuaries, strengthened to 202% in 2021 from 189% in 2020.

Good performance financial
According to Fitch, “SCR is posting a record in terms of financial performance”. These results are reflected in a return on equity (ROE) calculated by Fitch of 11% in 2021, which is slightly below its five-year average of 13%. The reinsurer’s net income in 2021 was supported by a strong investment component, manifested by a return of 5.3%, and, to a lesser extent, by positive underwriting results, particularly in the “Non-life” and “Life” categories. In addition, Fitch believes that the profitability of non-life underwriting at SCR has remained solid, with a combined ratio of 94% which remains unchanged in 2021.

“Conservative” provisioning
SCR’s provisioning practices are deemed by Fitch to be “prudent”. This observation is, precisely, “based on long experience and solid expertise in the key markets where the SCR operates”, estimates the rating agency. It also reports an adequate provisioning methodology and the accuracy of its initial estimates. It is noted, in this sense, that the SCR orders each year independent actuarial examinations of its levels of provisioning from independent international firms, which confirms the point of view of the international agency on the good practices of provisioning of the Moroccan reinsurer. .

The “most favorable” SCR profile
In its rating, Fitch ranks SCR’s business profile as “the most favorable” compared to other Moroccan insurers and reinsurers. For the agency “the SCR is not only a leading reinsurer in Morocco, but also the second reinsurer in Africa”. As such, the company underwrites reinsurance contracts, mainly in traditional insurance branches, such as automobile or capital goods, but also in specialized branches, such as marine, aviation or even engineering. In its analysis, Fitch considers SCR’s reinsurance and risk management to be strong and support its rating. “The reinsurer has a strong credit quality retrocession panel, as Moroccan regulations require retrocession counterparties to be rated “A-” and above,” it is noted in this perspective. The rating agency considers SCR’s long-standing ties with its partners to be qualitative and important for the company’s credit profile.

Sensitivity factors

Among the factors that could, individually or collectively, lead to a negative change in rating, Fitch advances, in particular, unfavorable changes in the guarantee for the SCR, or even a declining domestic market share. As for the factors that could lead to an improvement in the rating of the SCR, the agency notes that the latter has the highest of Fitch on the national scale. However, an upgrade is therefore not possible.

Sanae Raqui / ECO Inspirations

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