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COMMENTS

When Is A Start-Up Insurer Not A Start-Up Insurer?


When Is A Start-Up Insurer Not A Start-Up Insurer?

Newly formed insurance companies have had mixed fortunes in recent decades, and their longevity depends on a variety of factors. The limited operating lives of start-up companies is not an absolute rating constraint under S&P Global Ratings' insurance rating methodology. We don't explicitly cap our ratings on start-ups, and under certain conditions, we do not consider a newly formed insurer to be a start-up. Some have been set up to meet specific market or regulatory needs; others are spin-offs and may have transferred considerable expertise and books of business from their former parent.

We define insurance start-ups as companies with limited track records and operating histories. The key underlying drivers of creditworthiness for start-ups are the same as for established companies and our analysis is forward-looking. For example, if growth is slower than the business plan, we may not always consider this to be credit-negative. Success in the insurance world means being prepared for a marathon, not a sprint.

Our recently published insurance criteria (see "Insurers Rating Methodology," published on July 1, 2019) provides more scope for analytical judgement in assessing start-up insurers. For instance, we no longer require that a new insurer has a five-year track record to avoid being labelled a start-up. Instead, we require some track record of past performance.

When A Start-Up Has Supportive And Differentiating Factors

The key underlying drivers of insurance start-ups' creditworthiness are the same as those for established companies as described in "Insurers Rating Methodology," on July 1, 2019. Our analysis is forward-looking and considers aspects such as the ability of an insurer to execute on its business plans and prospective balance sheet management.

The below case studies highlight some standout features that can help support the credibility of a new insurer's business plan, such as an experienced and successful management team, robust governance, a board that effectively challenges senior management, and a strategy that positions the company for future profitable growth.

We recognize the importance of a strong balance sheet to absorb the strain of the rapid business growth that is typical of a start-up, and the potential for a higher degree of volatility in capital and earnings. These factors, along with a promising pipeline of new business in the relevant sector, can support robust creditworthiness for a newly formed insurer.

When A Start-Up Is Not A New Business

A newly established insurer may not be viewed as a start-up if its business has been spun off from an established company to serve a new purpose. Spin-off companies typically have established business profiles and management teams and a track record of performance.

New Insurers Come In All Shapes And Sizes

Unique features that differentiate a start-up insurer from the established competition, or a start-up's integral role in the operations of a higher rated parent, can support creditworthiness.

Unique features

A start-up insurer may have unique attributes that provide it with special access to certain business sectors or financial support. Such distinguishing features can help the new insurer establish a market presence, despite strong competition from incumbents.

For example, Flood Re Ltd. has the unique ability to source its revenues directly from insurance companies writing home insurance in the U.K. It targets insurers competing for business in flood-prone areas that want to avoid incurring exposure to flood risk. If needed, it also has unfettered access to a top-up levy charged to the U.K. home insurance industry, which enhances its financial and capital positions.

The 'A-' ratings we assigned to Flood Re at its inception in 2016 factored in our expectation that the company would quickly build up its capital base.

Similarly, Saudi Re for Cooperative Reinsurance Co. (Saudi Re) was, at its inception, the only locally incorporated reinsurer in a marketplace where premiums ceded to reinsurers outside the country incurred a 5% withholding tax. The existing regulations, if enforced, oblige Saudi Arabia-domiciled insurance cedants to place 30% of their outward reinsurance premiums with locally incorporated reinsurers. There were none until Saudi Re was established.

The 'BBB+' ratings we assigned to Saudi Re in its first year of operations indicated that we expected Saudi Re to benefit significantly from its situation. We also factored in Saudi Re's broadly based and supportive shareholders and strong capitalization.

Membership of an established group

A new insurer's creditworthiness can be enhanced by its integral role in the operations of a higher-rated parent. Based on our view of the subsidiary's strategic importance to and integration with the parent, we can embed group support in the ratings on the start-up insurer.

For example, Netherlands-based reinsurer Blue Square Re N.V. was established in 2010 and received its reinsurance license in 2011. We rated the company 'AA-' in 2012 because we consider it a core part of the AEGON group, into which it is significantly integrated. Blue Square Re's strategy was to accept risk from other parts of the AEGON group, either to enable greater retention of risk or to allow pooling of risk before it is ceded. We considered this to be consistent with the AEGON group's strategy of focusing more on underwriting risk.

In 2017, we assigned 'A' ratings to the newly formed Irish insurer Chaucer Insurance Co. DAC (CIC) because we viewed CIC as core to its then-parent, The Hanover Insurance Group Inc. (collectively, The Hanover). Although, CIC was an Irish start-up, The Hanover had been writing business in Europe since 2011, and CIC would write business in lines in which The Hanover has an established track record. Risk management at CIC would also be completely integrated with the rest of the group.

In 2018, we assigned 'mxAAA' Mexico national scale ratings to Swiss Re Corporate Solutions Mexico (SRCSMX), a newly formed insurer authorized to write direct insurance in Mexico in 2017. Despite our expectation that SRCSMX would make a small contribution to income and capital for its parent company Swiss Re Corporate Solutions Ltd. (SRCS), the high use of reinsurance demonstrated that SRCS had committed to offering long-term support. SRCSMX was considered to be a key part in SRCS' ongoing strategic plan to expand operations in high-growth markets. Further, we expect that SRCS would provide timely financial support to fund the growth of its subsidiary, as well as in the event of financial stress.

In 2015, we assigned the newly formed Legal & General Reinsurance Co. Ltd. (L&G Re) an 'A+' rating, one notch below the ratings on its parent's core operating entities. We considered L&G Re to be a highly strategic subsidiary of the Legal & General Group, owing to its targeted role in pursuing the group's expansion in the international longevity risk transfer market. L&G Re was involved in executing the parent's international diversification agenda, and had close operational, strategic, and financial integration with the rest of the group.

From Start-Up To Competitor

Start-up insurers face several challenges in implementing their business ambitions. Balancing financial discipline against strategic execution is an important factor in their creditworthiness.

We do not necessarily view short-term difficulties in achieving the growth targets outlined in the business plan negatively. For example, if this reflects pricing discipline in its financial risk management, it demonstrates strong oversight of pricing and capital management. This can be critical at a time when scaling up is essential to overcome start-up costs.

The new insurer also needs to demonstrate that it can overcome the competitive disadvantages arising from its limited track record of profitability and market position. Overall, we consider a patient and disciplined long-term approach, combined with unique attributes that differentiate the start-up from the competition, to be more favorable for creditworthiness than unsustainable growth.

Related Criteria And Research

Related Criteria
  • Insurers Rating Methodology, July 1, 2019
  • Group Rating Methodology, July 1, 2019

This report does not constitute a rating action.

Primary Credit Analysts:Simon Ashworth, London (44) 20-7176-7243;
simon.ashworth@spglobal.com
Simran K Parmar, London (44) 20-7176-3579;
simran.parmar@spglobal.com
Secondary Contact:Mark Button, London (44) 20-7176-7045;
mark.button@spglobal.com
Additional Contact:Insurance Ratings Europe;
insurance_interactive_europe@spglobal.com

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