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 adequate capitalization. Offsetting these strengths are the club's history of marginal operating performance and its concentration on a volatile insurance class that features an unpredictable size and frequency of claims.

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

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

We continue to view the club's operating performance as marginal. We are encouraged by the actions taken by the club in the 2011-2012 renewals; it de-risked its book by terminating its loss-generating membership. During the last decade the club recorded several years of combined ratios over 115%, which resulted in a series of unbudgeted calls to members in order to replenish depleted reserves. We await continuing evidence that the steps taken will result in a sustained improvement in profitability and combined ratios closer to a breakeven level. In our base-case scenario for financial-year-end 2013, 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, which we consider as reasonable in the context of its mutual status. (Lower combined ratios indicate better profitability. A combined ratio of greater than 100% signifies an underwriting loss.) We do not expect the club to have to resort to unbudgeted calls on its members in the medium term.


The stable outlook reflects our view that the club will maintain its good financial flexibility and that capitalization will continue to improve. In particular, we expect capitalization to benefit from the improvement in the club's operating performance, posting combined ratios more in line with its IG peers. Furthermore, we do not expect the club to make any significant shifts in the current investment portfolio mix that might cause a weakening in capitalization.

A positive rating action may occur if the club's underwriting performance improves to a level where the club starts recording combined ratios closer to 100% or posts results that result in a significant rebuilding of the club's capital. A return to the previous weak operating performance would likely lead to a negative rating action. A change in the investment portfolio mix whereby West of England returned to more significant equity and absolute return holdings would also place downward pressure on the ratings, as would any deterioration in capital adequacy levels.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, 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 And Assumptions, Jan. 20, 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 ((Bangalore Ratings Team, Hotline:+91 80 4135 5898 Jyothsna.BN@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Jyothsna.BN.thomsonreuters.com@reuters.net))