(The following statement was released by the rating agency)
Oct 01 - =============================================================================== Summary analysis -- Beazley Furlonge Ltd. - Syndicate 0623 -------- 01-Oct-2012 =============================================================================== CREDIT RATING: No public ratings. Country: United Kingdom Primary SIC: Insurance carriers, nec =============================================================================== Rationale
The assessment on Beazley Furlonge Ltd. - Syndicates 0623/2623/3622/3623 (collectively, Beazley, or the syndicates) reflects its core status to Lloyd's operation Beazley PLC (Beazley PLC, or the group; BBB+/Stable/--). The major assessment factors are Beazley's strong competitive position, its long track record of strong operating performance, and strong enterprise risk management (ERM). However, these strengths are partially offset by adequate capitalization.
Beazley's strong competitive position derives from its long history of success within the Lloyd's Market (Lloyd's; A+/Positive/--), 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 track record of growth. 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 such acquisitions will bring with them 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 risks. 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: GBP1.3 billion) and by no more than 10% in 2013, partly reflecting the single-digit premium rate increases, notably for direct property, reinsurance, and specialty businesses.
We view the syndicates' 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 syndicates' five-year average combined ratio is 89%. Despite significant catastrophe losses in 2011, the syndicates posted a respectable net combined ratio of 98% which is similar to Beazley PLC's 99% (just over 80% of the group's premiums emanates from the syndicates).
That said, we note that Beazley has benefitted from significant reserve releases from prior years, which reduced the group's combined ratio by 14 percentage points in 2011. Because of the benign losses and significant reserve releases (equating to a reduction of 7 percentage points), the group posted a very strong net combined ratio of 91% for the first half of 2012, which is broadly similar to its peers. Our base-case scenario assumes that Beazley is likely to post a very strong net combined ratio of about 90% and a return on revenue of 10% at year-end 2012, subject to normal losses in the last four months of the year and supported by prior-year releases, albeit at a lower level. This may put Beazley ahead of its peers. For 2013, our base-case scenario assumes that the group is likely to post a net combined ratio of close to 95%, assuming that catastrophic events cost no more than $100 million and that reserve releases are close to $100 million.
In our view, the syndicates' capitalization is adequate. Our view of Beazley's capitalization is largely based on our measurement of the group's risk-based capital adequacy (measured using our model), which 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 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 it will manage risk in such a way that risk-based capital does not drop below 'BBB' over the next 24 months.
The stable outlook reflects our view that the group'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 our assessment 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 revision of our assessment than some of its peers in the event of unexpected earnings volatility.
It is unlikely that we will raise our assessment of risk-based capital over the two year assessment horizon, because Beazley's capitalization does not support a higher assessment.
Related Criteria And Research -- Beazley PLC, Oct. 1, 2012
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-- Management And Corporate Strategy Of Insurers: Methodology And Assumptions, Jan. 20, 2011
-- Lloyd's Syndicate Assessment Methodology Revised In Light Of Lloyd's Market's Move To Annual Accounting, June 28, 2006
-- Interactive Ratings Methodology, April 22, 2009