Our base-case scenario assumes that Canopius is likely to post a strong net combined ratio of about 95% and a return on revenue close to 10% at year-end 2012 bearing in mind the impact of Hurricane Sandy. For 2013, we forecast that the syndicate is likely to post a net combined ratio of close to 95%, assuming that catastrophic events cost no more than GBP55 million. We do not believe Syndicate 0958 presents risk of earnings dilution once the business is integrated in 2013, and beyond.
We note that the high catastrophe risk adds volatility to Canopius’ capitalization. Our view of the syndicate’s capitalization is largely based on risk-based capital adequacy of Canopius Group Limited (unrated, CGL), measured using our model as its economic interest in the syndicate is about 70%. CGL’s risk-based capital (measured using our model) is materially deficient at the ‘BBB’ level. Following the capital injection (GBP73.6 million) and the retention of first-half 2012 earnings (GBP33 million), the group’s risk-based capital improved compared to the year-end 2011 position, albeit remaining below the ‘BBB’ level. Our base-case scenario assumes that the group’s risk-based capital is likely to improve further in 2013, mostly due to retained earnings. That said, we do not expect the group’s risk-based capital to improve to the ‘BBB’ level over the next two years.
The stable outlook reflects our view that the group’s risk-based capital adequacy (measured using our model) will not drop below its current levels (see above) over the next 24 months, and that Canopius will maintain its good competitive position and post good underwriting results prospectively.
We could lower our assessment if:
-- The group’s risk-based capital (measured using our model) falls, which could result from above-average catastrophe losses that could deplete its capital; or
-- Canopius does not post a good underwriting performance (i.e. combined ratios close to 95% or below); or
-- Omega negatively impacts Syndicate 4444’s financial profile.
Although unlikely over the next 12-18 months, we might raise our assessment if Canopius’ capitalization improves to an adequate level.
Related Criteria And Research
-- Assumptions For Quantitative Metrics Used In Rating Insurers Globally, April 14, 2011
-- 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