Ratings Recap: Brit, Ecclesiastical

A.M. Best Europe – Rating Services Limited has commented that the financial strength rating of ‘A’ (Excellent) and issuer credit rating (ICR) of “a” of UK-based Brit Insurance Limited (BIL) are unchanged following a strategic review by Brit Insurance Holdings B.V. (Brit) of its underwriting platforms. From the beginning of 2012, all of the group’s reinsurance and specialty business will be written by Lloyd’s Syndicate 2987 (managed by Brit Syndicates Limited). BIL’s underwriting portfolio will comprise solely of the group’s core U.K. business, which has a focus on insurance products for small to medium-sized enterprises and niche personal lines. Best explained that “BIL’s stand-alone risk-adjusted capitalization in 2012 is expected to remain at a level that supports its current ratings, as an anticipated reduction in BIL’s capital will be offset by a reduction in underwriting risk. From 2012, the performance of Brit’s core U.K. business will be the principal driver of BIL’s underwriting results. Concerns regarding the historic weak performance of this business have been partly alleviated by actions taken by management in recent years to improve its profitability, including the withdrawal from certain lines of business. However, should an expected further improvement in the results of the U.K account fail to materialize, a negative rating action is likely.” In addition Best noted that the decision “to no longer underwrite specialty and reinsurance business through BIL will reduce the contribution the company makes to the Brit group’s income.” Best added that it would “closely monitor Brit’s commitment to initiatives that will support BIL’s underwriting performance and business profile. In addition, the ability of the smaller company to compete in the U.K. market with insurers that benefit from larger distribution channels and better economies of scale will be monitored. A positive rating action is unlikely over the next 12-24 months.” However, Best said a “deterioration in risk-adjusted capitalization at either BIL or Brit, the absence of an improvement in the performance of the U.K business that will continue to be written by BIL or a reduction in the group’s commitment to improving BIL’s performance,” could lead to a negative rating.

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of UK-based Ecclesiastical Insurance Office plc (EIO). Best also affirmed the debt rating of “bbb” on the £106,450,000 [$166,471,000] 8.625 percent non-cumulative irredeemable preference shares issued by EIO. The outlook for all of the ratings is stable. EIO’s consolidated risk-adjusted capitalization is “expected to remain excellent, despite exposure to catastrophe events in 2011,” said Best. “Overall earnings have been volatile over the last five years, owing to catastrophe losses, as well as EIO’s relatively high exposure to equity investments (approximately 25 percent of total investments as at year-end 2010). Prospective underwriting earnings are expected to be less volatile as a consequence of recent actions taken by management that reduce the company’s exposure to catastrophes, including the withdrawal from London market business in 2010 as well as the decision to place the company’s New Zealand subsidiary into run off in 2011.” However, Best also noted that “EIO remains exposed to investment earnings volatility. A material fall in EIO’s pre-tax result is expected in 2011 (compared to a profit that excluded discontinued operations of £50.4 million [$79 million] in 2010). A small technical deficit is anticipated, principally due to losses from earthquakes in New Zealand and Japan, although EIO’s comprehensive reinsurance program will limit the impact of these catastrophes on earnings.” In addition Best indicated that “results will be affected by weak market conditions in the United Kingdom and unfavorable claims trends, particularly for liability business. Investment income is likely to be positive, but lower than in 2010 due to the poor performance of the equity portfolio. EIO has a strong specialist business profile in the not-for-profit segment of the market, writing a portfolio of mainly UK commercial property and liability risks. EIO’s operating environment remains challenging due to intense competition from larger insurers operating in its niches and the impact of weak economic conditions on demand for its products.” Nonetheless Bes added it “believes that EIO’s long-standing relationships with clients and its specialist expertise in insuring Anglican churches, independent schools and historical buildings provide some protection against price-based competition.” Best also said it believes EIO is “well positioned at its current rating level. Factors that could lead to negative rating actions include a significant decline in risk-adjusted capitalization, weaker than expected operating performance or deterioration in the support provided by reinsurers.”