Ratings Recap: Sunderland Marine, ENI

A.M. Best Europe – Rating Services Limited has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a-” of UK-based Sunderland Marine Mutual Insurance Company Limited (SMMI). Best explained that it has taken the ratings actions following a “significant deterioration in SMMI’s risk-adjusted capitalization during 2011, due to the effect of an unusually high frequency of large losses on the company’s relatively small capital base.” Best added that “although risk-adjusted capitalization has been restored in 2012 to a level that supports SMMI’s ratings, this has been achieved by increasing its reliance on reinsurance as the company has limited financial flexibility. The negative outlook reflects SMMI’s volatile earnings, weakened risk-adjusted capitalization, as well as its increased reliance on third party reinsurance, particularly quota share agreements.” Best indicated that SMMI is expected to report a “small pre-tax profit in 2012 (2011: £7.0 million loss [$10.92 million]), with investment income offsetting a technical loss. Weak operating performance in 2011 was due to unusual loss experience in the marine hull account in the third quarter of the year. In 2012, the company has taken measures to reduce performance volatility, primarily through changes to its reinsurance program. These include a reduction in its cross class annual aggregate deductible and the purchase of additional cover for its protection and indemnity accounts.” In addition Best noted that although SMMI’s business line diversification is limited, “it has a strong business profile in its specialist marine and aquaculture markets, where its underwriting expertise and risk management capabilities support high client retention. Business is underwritten in a broad range of territories, which include the United States, the United Kingdom, Continental Europe and Australasia.” Best said it would “continue to closely monitor SMMI’s risk-adjusted capitalization, as well as the impact of the measures that have been put in place by the company to reduce earnings volatility. Negative rating actions over the next 12-24 months could follow if there is deterioration in SMMI’s risk-adjusted capitalization or if there is not an improvement in its operating performance.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘A’ (Excellent) and an issuer credit rating of “a” to ENI Insurance Limited (EIL), the sole captive of Eni S.p.A. (Italy), an Italian multinational gas and oil company with operations in more than 80 countries, which is based in Ireland. The outlook for both ratings is stable. The ratings of EIL reflect its “strong risk-adjusted capitalization, comprehensive reinsurance program and overall strong financial performance,” said Best. Also, the ratings incorporate “a strong integration within the parent’s risk management structure. An offsetting factor is EIL’s current material fixed income exposure to peripheral European sovereigns. EIL was formed in June 2006 and writes the industrial risks of Eni S.p.A. with fire/property damage being the main line (77 percent of gross written premiums [GWP] in 2011), whereas 66 percent of GWP is written outside of Italy. In January 2007, industrial risks written by the ceased captive, Padana Assicurazioni S.p.A were transferred to EIL. This portfolio is expected to continue to run off for another few years.” Best said it believes that EIL’s “current strong level of risk-adjusted capitalization is partially a result of earnings retention (since the company’s inception), and despite the introduction this year of large dividend payments to its parent, the risk-adjusted capitalization is expected to remain supportive of EIL’s ratings.” In Best’s opinion, “the strong risk-based capital is also underpinned by a comprehensive reinsurance program, which provides a very good level of protection on the main lines of business and is placed with a strong panel of reinsurers. The company’s main program is fire/property damage and has a maximum retention for EIL of $50 million.” Best said it expects EIL “to continue to profit from its disciplined underwriting (five-year average combined ratio of 66 percent) and is likely to deliver a strong underwriting performance in the future.” Best will also monitor EIL’s investment portfolio closely “as over a third of the company’s fixed income portfolio is composed of peripheral European sovereign bonds. Upward rating movements are unlikely in the next two years. Negative rating actions could occur if a significant deterioration in EIL’s risk-adjusted capitalization would be linked to no evidence of support from Eni S.p.A. to boost the latter or any material deterioration in its peripheral European fixed income exposure. Additionally, any deterioration in EIL’s role within the group could also put pressure on its ratings.”