Best Affirms UK’s Ecclesiastical Insurance Office ‘A’ Rating; Outlook Stable

December 20, 2012

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), as well as the debt rating of “bbb” on the £106.45 million [$170.6 million] 8.625 percent non-cumulative irredeemable preference shares issued by EIO.

The outlook for all of the ratings is stable.

Best said the “ratings of EIO reflect its excellent risk-adjusted capitalization. In addition, the ratings factor EIO’s niche business profile, specializing in the not-for-profit sector of the UK market. An offsetting factor is EIO’s recent poor underwriting performance, which is reflected in a five-year average combined ratio of 102 percent. This has led to a reliance on investment income to generate positive earnings.”

The report also noted that “operating results over the last five years have been volatile, 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 2011).

“Going forward, underwriting earnings are expected to be less volatile due to management actions taken to reduce exposure to catastrophes and unprofitable lines of business. The company has ceased writing London market business, placed its New Zealand subsidiary into run off prior to disposing of it to a charitable trust and will withdraw from the UK motor market in 2013.”

Best indicated that EIO is expecting to make a pre-tax profit in 2012, compared to a, £8 million [$12.8 million] loss in 2011, “primarily due to a good investment return from EIO’s portfolio of UK equities, European equities and corporate bonds. Underwriting performance in the first half of the year was negatively affected by the weak performance of the liability portfolio in the UK and Ireland and increased reinsurance costs in Australia. In addition, the final technical result will reflect the impact of the UK floods in June, July and November.

“EIO has a specialist business profile in the not-for-profit segment of the market, writing a portfolio of mainly UK commercial property and liability risks,” Best continued. “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. However, EIO’s long-standing relationships with clients and its specialist expertise in insuring Anglican churches, independent schools and historical buildings continues to provide some protection against price-based competition.

“Positive rating actions are unlikely in the near to medium term. Factors that could lead to negative rating actions include a significant decline in risk-adjusted capitalization, continued poor underwriting performance or deterioration in the support provided by reinsurers.”

Source: A.M. Best

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