Best Assigns ‘B++’ Rating to New U.K. Property Exchange Insurer

A.M. Best Co. announced that it has assigned a financial strength rating of “B++” (Very Good) and an issuer credit rating of “bbb+” to U.K. insurer The Exchange Insurance Company Limited (ExCo) with a stable outlook.

ExCo, Best explained, operates in a new and relatively untried field. Its business “exclusively comprises the issuance of residential performance bonds designed to replace the cash deposit traditionally made when contracts are exchanged between parties during the purchase of residential property in the United Kingdom. The performance bonds ensure that, should the purchaser of the property fail to complete the transaction after the exchange of contracts, the vendor will receive a sum equivalent to the deposit agreed at the time contracts were exchanged. Should this occur, ExCo retains the right to recover the funds from the purchaser.”

Best said the ratings “reflect ExCo’s strong risk-adjusted capitalisation, stable prospective earnings and developing business position as an issuer of residential property exchange bonds.” The company’s limited business diversification and the risks associated with establishing a market for an entirely new product were cited as offsetting factors.

Best said it “believes ExCo’s risk-adjusted capitalisation is supportive of its business plan. On an absolute basis, the company is projected to have capital and surplus of approximately £2.2 million ($4 million) at year-end 2005.”

The rating agency also indicated that it “anticipates ExCo will produce stable earnings in 2006 and 2007, with a projected annual profit before tax in the range of £1.5 – £2.5 million ($2.7 – $4.5 million) in each year. There is potential for strong growth in future overall earnings, but this is largely dependent upon the development of business relationships and the marketing of exchange bonds during ExCo’s early years of operation. Earnings are unlikely to be impacted by the downturn in the insurance market.”

Best also noted that ExCo “has a limited profile as a small start-up operation issuing residential performance bonds, which are a new and untested product in the U.K. market. The ratings take into account that there is a risk that the product fails to attract profitable volumes of business.”

However, Best also said it “believes this is partially offset by the absence of any direct competition and recognizes ExCo’s progress in marketing the bonds to property contractors. Growth in premium income in the company’s early years (to approximately £5.5 million [$9.9 million] by 2007) is largely dependent upon the development of new relationships with estate agents, lawyers and property developers in order to market these bonds in place of traditional cash deposits.”