23 June 2023Analysis

AM Best affirms Scotia Re ratings

AM Best has affirmed the financial strength rating of A and the long-term issuer credit rating of “a+” (Excellent) of Scotia Reinsurance. The outlook of these ratings is stable.

The rating agency said that the ratings reflect Scotia Re’s balance sheet strength, which it assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management. The ratings also reflect implicit support from the greater organisation.

Scotia Re is primarily a life reinsurance subsidiary that assumes non-Canadian business, largely from Mexico, South and Central America, and the Caribbean, sourced through retail operations of the company’s ultimate parent, The Bank of Nova Scotia (Scotiabank). The initial book of business was assumed in 2017 from Scotia Insurance (SIB), which has a long history of favourable underwriting results. The assumed business produced favourable return metrics under Scotia Re after its fifth full year in operation.

AM Best said that the company’s balance sheet strength is bolstered further by the strongest level of risk-adjusted capitalisation, as measured by Best’s capital adequacy ratio, reflecting in part a conservative short duration and highly liquid investment portfolio. AM Best notes the company manages capital to specific targets and has kept absolute capitalisation levels largely flat, and Scotia Re could recapitalise in a stress scenario by adjusting its shareholder dividend payout.

The ratings reflect one notch of rating enhancement from the company’s sister entity, SIB, based on the transfer of the original block of business in 2017. Scotia Re has the implicit support of Scotiabank, the ultimate parent of both Scotia Re and SIB. Scotiabank can provide financial resources to Scotia Re if ever required.

These strengths are offset partially by Scotia Re’s dependence for growth on lending product originations in economies outside of Canada, many of which are deemed to have higher country risk profiles.

Creditor insurance premium growth from international business remains dependent on the global economy. Going forward, in addition to growing creditor insurance cross-sales on loans through face-to-face interactions between bank customers and agents, Scotiabank is also focusing on growing the digital distribution of products, and the impact of such sales initiatives on Scotia Re’s revenue and operating income will continue to be monitored by AM Best.