Fitch Ratings has affirmed Sterling Insurance Co Ltd’s (SICL) and Sterling Life Ltd’s (SLL) Insurer Financial Strength (IFS) ratings at ‘BBB+’. The Outlooks are Stable.
The companies are the underwriting members of the UK-based Sterling Insurance Group Limited (Sterling). The affirmation reflects consolidated capital commensurate with the rating level, Sterling’s business position and the group’s moderate investment risk.
Fitch considers capitalisation levels at both of the operating companies and at the group level to be commensurate with the rating levels. Sterling’s main shareholder converted GBP5m of preference shares into share capital in 2008 and GBP3m of debt into share capital in 2009, with a resulting improvement in capital adequacy, according to Fitch’s internal assessment. The agency views the main shareholder’s strong support to date and the absence of dividend payments as positive and considers it important that the group remains profitable to avoid capital erosion.
Fitch notes a continued improvement in Sterling’s profitability, driven by improved underwriting margins as well as strong investment returns, and expects this trend to continue in 2011 and 2012. Although net income fell to GBP0.5m from GBP1m in 2010, the Fitch calculated combined ratio improved to 102% from 104% over the same period. Nevertheless, Sterling still falls short of its own as well as Fitch’s underwriting expectations, which the agency views negatively.
Growth in non-life underwriting earnings resulted from stronger GWP as well as improved cost and claims management. Fitch expects these positive trends to continue in the light of management’s focus on strengthening weak profitability.
Fitch views Sterling’s investment risk as above average compared to peers. The group increased its credit exposure considerably in 2009 and 2010 and Fitch notes that at end-2010, corporate bonds represented 69% of invested assets (H110: 54%), which is a high proportion relative to peers. More positively, the credit quality of Sterling’s fixed income portfolio is healthy and Sterling holds only a minor portion of its portfolio in equities. The agency does not believe that Sterling’s investment risk will deteriorate to a level no longer commensurate with the current ratings.
Sterling remains dependent on a small number of clients, which the agency continues to view as a weakness. In addition, the group’s exposure to creditor business remains a concern, although this has steadily declined in recent years and represented 13% of GWP in 2010, compared to 21% in 2009. The fact that the group is largely owned by one individual also exposes the group to some uncertainty, although the agency views favourably the strong support and commitment the main shareholder has shown to the business.
In 2011, Sterling started to administer a book of credit insurance policies on behalf of a bank. The group assumes no underwriting risk and the deal is expected to add to Sterling’s profitability. Fitch understands that the transition has been smooth to date. In addition, the agency notes that the group is confident of securing another administrative deal shortly of a similar size and profitability. Fitch currently views this as credit-neutral, but could view it positively in the future if it successfully diversifies the group’s revenue base.
Fitch views capital deterioration as the most likely reason for a downgrade. This could result from a change in dividend policy resulting in significant capital extraction, as well as poor underwriting profitability and/or poor investment results leading to a depletion of capital. Fitch would be concerned if the group reported a combined ratio in excess of 105%. In addition, introduction of further risk into the investment portfolio could also lead to a downgrade.
Source : Fitch Ratings Press Release
