RPT-Fitch affirms Sterling Insurance & Sterling Life IFS at 'BBB+'; outlook stable

Fri Jun 27, 2014 5:29am EDT

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June 27 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Sterling Insurance Co Ltd's (SICL) and Sterling Life Ltd's (SLL) Insurer Financial Strength (IFS) ratings at 'BBB+'. The Outlooks are Stable. The companies are the underwriting members of the UK-based Sterling Insurance Group Limited (together referred to as Sterling).

KEY RATING DRIVERS

The affirmation is based on Sterling's supportive risk-adjusted capitalisation and improved underwriting profitability. However, Sterling's ratings remain constrained by its limited scale and operating profile.

Sterling is a niche UK insurance company that has established a recognisable franchise with a strong distribution network. However, with GBP155m of gross written premiums in 2013, it remains a small player in a competitive market. Its relatively small scale and concentration in the UK market make it more difficult for Sterling to control pricing, access external finance and absorb a potential fall in demand for its products.

Fitch expects SICL's and SLL's levels of risk-adjusted capitalisation to remain stable and supportive of the rating. In 2013, regulatory solvency was 139% and 194% for SICL and SLL, respectively.

Sterling's net income continued its positive trend and increased to GBP6.1m in 2013 (2012: 4.5m, 2011: GBP3.6m), underpinned by robust technical results and a strong investment return. This also includes GBP1m of income from Sterling's administration business which is expected to reduce over the next 12- 24 months as this business winds down naturally.

Non-life technical profitability was strong in 2013, reflected in an improved Fitch-calculated combined ratio of 96.7% (2012: 98.6%). Losses from the storms and floods of December 2013 and January 2014 are expected to fall broadly within Sterling's usual allowance for weather-related losses. Fitch expects this positive trend to continue in the absence of significant weather-related losses in 2H14. The performance of the life business remained relatively stable, contributing GBP699,000 to the 2013 technical results (2012: GBP908,000).

RATING SENSITIVITIES

Fitch considers an upgrade unlikely in the medium term given the company's limited scale and operating profile.

A significant deterioration in underwriting performance, weak investment results and/or more active capital management leading to a depletion of capital would put downward pressure on the ratings. A Fitch-calculated combined ratio in excess of 105% over a sustained period or the introduction of further risk into the investment portfolio could also lead to a downgrade.

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