TEXT-S&P summary: Beazley PLC
(The following statement was released by the rating agency)
Oct 01 - =============================================================================== Summary analysis -- Beazley PLC ----------------------------------- 01-Oct-2012 =============================================================================== CREDIT RATING: Country: Ireland Local currency BBB+/Stable/-- Primary SIC: Holding companies, nec =============================================================================== Credit Rating History: Local currency Foreign currency 09-Jun-2009 BBB+/-- --/-- ============================================================================== Rationale
The 'BBB+' long-term counterparty credit rating on Ireland-domiciled Beazley PLC reflects its position as the current holding company of the Beazley group. The group's principal source of earnings derives from its participation in Beazley Furlonge Ltd. - Syndicates 0623/2623/3622/3623 (the syndicates; Lloyd's Syndicate Assessment '4/Stable'). The syndicates operate within the Lloyd's Insurance Market (Lloyd's or the Market; insurer financial strength rating, A+/Positive/--).
The rating primarily reflects key features of Beazley's operating profile, including its strong competitive position, the syndicates' strong earnings and strong enterprise risk management (ERM). These strengths are partially offset, however, by only adequate capitalization, partly due to increased catastrophe and investment risk.
Beazley's strong competitive position reflects its long history of success within Lloyd's, notably its leading position in the medium-tail specialty business, which accounted for 42% of premium income in 2011. Furthermore, Beazley has a strong reputation in property (which accounts for 21% of its business), marine (16%), and treaty reinsurance (10%).
Strategic acquisitions have supplemented the group's strong growth track record. Standard & Poor's Ratings Services believes that the group will continue to look to acquire companies to enhance its offering, particularly in the U.S. We believe that this will bring with it execution risks, especially given the complexity and tail of the risks that the syndicates typically write. That said, Beazley's strong underwriting and effective cycle management controls mitigate these factors. Our base-case scenario assumes that Beazley's gross premium income is likely to increase slightly by about 5%-10% at year-end 2012 (2011: $1.7 billion) and by no more than 10% in 2013. The improvement partly reflects single-digit premium-rate increases, notably in direct property, reinsurance, and the specialty businesses. We view the group's operating performance as strong. Over the past decade, Beazley has been consistently profitable and has performed at least in line with its Lloyd's peers. The group's five-year average combined ratio is 92%. Despite significant catastrophe losses in 2011 (which added 16 percentage points to the combined ratio), the group posted what we deem to be a respectable net combined ratio of 99%. That said, we note that the group benefited from significant reserve releases from prior years, which reduced the combined ratio by 14 percentage points in 2011. Because of benign losses and significant reserve releases (equating to a reduction of seven percentage points), the group posted a very strong net combined ratio of 91% in the first half of 2012, which is broadly similar to that of its peers.
Our base-case scenario assumes that Beazley is likely to post a very strong net combined ratio of about 90%, a return on revenue of 10%, and a return on equity of close to 15% at year-end 2012, subject to normal losses in the last four months of the year. This may put the group ahead of its peers. We believe that continued prior-year releases will support this result, albeit at a lower level.
In our view, Beazley's capitalization is adequate. The group's risk-based capital (measured using our model) reduced to 'BBB' by year-end 2011, compared with 'A' in 2009. This reduction was due to a combination of increased exposure to catastrophe losses relative to the capital base, increased market risk, a special dividend payout, and a share repurchase.
Our base-case scenario assumes that the group's risk-based capital, measured using our model, is likely to remain at the 'BBB' level at year-end 2012 and 2013 because retained earnings will offset a GBP30 million subordinated debt repurchase in 2012. In light of Beazley's strong ERM, we believe that the group will manage risk in such a way that risk-based capital does not drop below 'BBB' over the next 24 months.
The Beazley group continues to generate strong cash flows to support its highly liquid investment portfolio and short-duration bond portfolio, which has very strong credit quality. In June 2012, bonds accounted for 74.4% of the group's total invested assets, with 14.9% in cash and cash equivalents, and 10.3% of hedge funds (a portfolio built up since 2009).
Although the hedge funds in which Beazley has invested have relatively short redemption schedules, we believe that these investments will have limited liquidity in a stressed environment. Overall, management estimates that it can liquidate 75% of the fixed income portfolio within one day and 95% within three days. The group's letter of credit facility of $225 million remains undrawn.
The stable outlook reflects our view that Beazley's risk-based capital adequacy, measured using our model, will remain at least in the 'BBB' category over the next 24 months, and that Beazley will maintain its strong competitive position and strong underwriting performance.
We could lower the ratings if the group's risk-based capital, measured using our model, falls below 'BBB'. This could result from a large-scale acquisition, a material buy-back of its remaining subordinated debt, or a material return of capital to shareholders. We do not expect the group's risk-based capital to improve to the 'A' category over the next two years. Because of its adequate capitalization, Beazley is more prone to a negative rating action than some of its peers in the event of unexpected earnings volatility.
A positive rating action is unlikely over the next two years, because the group's capitalization does not support a higher rating.
Related Criteria And Research -- Beazley Furlonge Ltd. - Syndicates 0623/2623/3622/3623, Oct. 1, 2012 -- Principles Of Credit Ratings, Feb. 16, 2011
-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
-- Group Methodology, April 22, 2009 -- Interactive Ratings Methodology, April 22, 2009 -- Counterparty Credit Ratings And The Credit Framework, April 14, 2004 ((Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.firstname.lastname@example.org, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.email@example.com))