TEXT-S&P summary: West of England

(The following statement was released by the rating agency)

Oct 09 - =============================================================================== Summary analysis -- West of England ------------------------------- 09-Oct-2012 =============================================================================== CREDIT RATING: Country: Luxembourg Local currency BBB-/Stable/-- Primary SIC: Fire, marine, and casualty insurance =============================================================================== Credit Rating History: Local currency Foreign currency 02-Oct-2012 BBB-/-- --/-- 01-Oct-2012 NR/-- --/-- 23-Jan-2012 BBpi/-- --/-- =============================================================================== Rationale

The ratings on Luxembourg-based insurer West of England reflect Standard &Poor's view of the club's good financial flexibility and adequatecapitalization. Offsetting these strengths are the club's history of marginaloperating performance and its concentration on a volatile insurance class thatfeatures an unpredictable size and frequency of claims.

We view West of England's financial flexibility as good, reflecting itsability to collect unlimited additional premiums (by making unbudgetedsupplementary calls) from members on open policy years, and to imposesignificant premium increases at renewal. The obligation to pay unlimitedcalls is contractually enforceable and West of England, like otherInternational Group (IG) members, has significant powers to obtain funds duefrom members. These include the ability to impound ships and pursue otherconnected parties for payment, withdraw cover from inception, and refuse anyclaims payments. The club has made significant use of supplementary calls inthe past as a result of deteriorating operating performance and largeinvestment losses. The repeated use of these calls could dampen the club'scompetitive position, especially in comparison with more stable protection andindemnity (P&I) clubs, as high-quality members could seek coverage from otherP&I clubs with stronger capital positions. However, the club has not madeunbudgeted calls on its members in the past three years (2009-2011), and we donot expect the club to make any such calls in the medium term.

We consider the club's capitalization to be adequate, based on capitaladequacy that has improved from marginal to adequate, and adequate reserving.Capital adequacy, as measured by our risk-based model, has benefited from asignificant de-risking of West of England's investment portfolio during 2012.We expect to see further reductions in its exposure to equities and absolutereturn funds to the point that these will represent less than 14% of theclub's investment portfolio by year-end 2013 (Feb. 20, 2012: 23%).Consequently, we expect that the club's capital adequacy following thede-risking will be more supportive of the club's financial strength rating byFeb. 20, 2013. We also consider that West of England has improved itsreserving procedures in recent years following several years of reservestrengthening prior to 2011. The club has made reserve releases in the lasttwo financial years and we anticipate it will make another release in February2013. In our base-case scenario we expect that West of England will sustainits adequate capital adequacy in the medium term by rebuilding members' fundsand maintaining equity and absolute return holdings of no more than 15%-20% ofthe invested assets. We do not anticipate West of England having to strengthenits reserves over the medium term.

We continue to view the club's operating performance as marginal. We areencouraged by the actions taken by the club in the 2011-2012 renewals; itde-risked its book by terminating its loss-generating membership. During thelast decade the club recorded several years of combined ratios over 115%,which resulted in a series of unbudgeted calls to members in order toreplenish depleted reserves. We await continuing evidence that the steps takenwill result in a sustained improvement in profitability and combined ratioscloser to a breakeven level. In our base-case scenario for financial-year-end2013, we forecast West of England to post a combined ratio in the 103%-105%range and for the club to record a profit after tax of about $5 million, whichwe consider as reasonable in the context of its mutual status. (Lower combinedratios indicate better profitability. A combined ratio of greater than 100%signifies an underwriting loss.) We do not expect the club to have to resortto unbudgeted calls on its members in the medium term.


The stable outlook reflects our view that the club will maintain its goodfinancial flexibility and that capitalization will continue to improve. Inparticular, we expect capitalization to benefit from the improvement in theclub's operating performance, posting combined ratios more in line with its IGpeers. Furthermore, we do not expect the club to make any significant shiftsin the current investment portfolio mix that might cause a weakening incapitalization.

A positive rating action may occur if the club's underwriting performanceimproves to a level where the club starts recording combined ratios closer to100% or posts results that result in a significant rebuilding of the club'scapital. A return to the previous weak operating performance would likely leadto a negative rating action. A change in the investment portfolio mix wherebyWest of England returned to more significant equity and absolute returnholdings would also place downward pressure on the ratings, as would anydeterioration in capital adequacy levels.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global CreditPortal, unless otherwise stated.

-- Principles Of Credit Ratings, Feb. 16, 2011 -- Interactive Ratings Methodology, April 22, 2009 -- Counterparty Credit Ratings And The Credit Framework, April 14, 2004

-- Management And Corporate Strategy Of Insurers: Methodology AndAssumptions, Jan. 20, 2011

-- Refined Methodology And Assumptions For Analyzing Insurer CapitalAdequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

-- Group Methodology, April 22, 2009 ((Bangalore Ratings Team, Hotline:+91 80 4135 5898Jyothsna.BN@thomsonreuters.com,Group id: BangaloreRatings@thomsonreuters.com,Reuters Messaging:Jyothsna.BN.thomsonreuters.com@reuters.net))