AM Best affirms Ecclesiastical's ratings despite recent losses

AM Best has affirmed Ecclesiastical’s financial strength rating of A and issuer credit rating of ‘a’, despite losses from its underwriting operations.

However, the ratings agency said a positive movement on the ratings is unlikely in the near to medium term. Negative rating actions could occur if the company’s corrective actions on the underwriting account fail to improve performance in line with AM Best’s expectations.

Additionally, a significant decline in risk-adjusted capitalisation or substantial deterioration in operating performance could also result in negative rating actions.

Financial strength ratings are a key measure used by brokers and clients to determine an insurer’s ability to pay claims, while the issuer credit rating focuses on the company’s overall ability to pay its financial obligations.

Exit from non-performing lines could correct underwriting loss

AM Best said the current ratings reflect the insurer’s excellent risk-adjusted capitalisation and its specialist business profile within the not-for-profit sector of the UK market. The risk-adjusted capitalisation could help determine if the insurer has enough capital to withstand a downturn in the economy.

But the positive rating factors are partially offset by the company’s underwriting operations, which have generated losses since 2010.

Underwriting performance has been particularly affected by several catastrophe losses and more recently, increased claims frequency and severity on certain liability lines. This is reflected in a five-year average combined ratio of 102%.

The ratings agency added: “Although underwriting performance is a negative rating factor, AM Best views positively the remedial steps that the company is taking to return its underwriting operations to a profitable position.

“These actions include exiting a number of non-performing lines, increasing premium rates on loss-affected policies and reducing overall catastrophe exposure. AM Best expects these actions to lead to a positive underwriting result for 2014.”

In December Ecclesiastical confirmed it was pulling out of the care home insurance market this year. After 1 March it will not write any new business or invite renewals from care homes apart from those operated by charities.

Outlook positive, but investment portfolio remains volatile

AM Best said the company’s risk-adjusted capitalisation remains excellent and is a positive rating factor. In recent years it has been bolstered by retained earnings and an overall reduction in premium risk, following the company’s withdrawal from certain unprofitable lines.

Ecclesiastical generated a strong operating profit for 2012 and is expected to report a further improved result for 2013, despite losses from underwriting operations.

The operating performance is largely the result of strong investment returns, driven by its above average exposure to equities, which have seen significant gains over the period.

However, Ecclesiastical’s investment portfolio remains inherently volatile, with future investment returns largely dependent on the performance of UK and European equity markets.