Apr 05 -
Summary analysis -- Irish Public Bodies Mutual Insurances Ltd. ---- 05-Apr-2012
CREDIT RATING: Country: Ireland
Local currency BBB+/Negative/--
Primary SIC: Fire, marine, and
Credit Rating History:
Local currency Foreign currency
19-Apr-2011 BBB+/-- --/--
07-Nov-2006 NR/-- --/--
The ratings reflect our view of Irish Public Bodies Mutual Insurances Ltd.'s (IPB) strong financial profile, fueled by very strong capitalization and strong operating performance. These factors are offset by IPB's competitive position, which we view as a weakness for the ratings, despite being good. In addition, we consider IPB's enterprise risk management (ERM) framework to be weaker than peers and it has material exposure to equity.
IPB's strong financial profile underpins the ratings, in our view, supported by IPB's strong operating performance and very strong capitalization. Over the past five years, IPB had produced very strong returns compared to its Irish peers. Its five-year (2006-2010) net combined ratio was 57%, compared with its peer group's' 86% and its return on revenue was 59% compared with its peer group's 20%. IPB's capital adequacy at year-end 2011 (based on projections and using Standard & Poor's capital model) is extremely strong. It is supported by a good level of reserving and adequate level of reinsurance coverage.
IPB historically had an unrivaled position within its core niche liability market--it has been the insurer of choice for many of its mutual members, which are public bodies in its three core distinct segments: local authorities, health, and education. This enabled IPB to consistently deliver a strong operating performance. In our view, IPB's robust competitive position in the Irish liability market has reached saturation, limiting its future growth. The recent economic crisis and the austerity measures the government is undertaking could weaken its position, but we anticipate that it will remain good in the medium term.
We consider ERM to be materially weaker than its peers in the Irish market, most of which are subsidiaries or large corporations and benefit from group support in this area. On the positive side, IPB is rapidly addressing the shortcomings that have been identified in its corporate governance and ERM frameworks, ahead of the EU's Solvency II directive on the supervision of insurers.
In our opinion, IPB's investment portfolio is generally conservative; nearly 80% of its investment portfolio is concentrated in bonds. Nevertheless, we believe the company may be highly exposed to market risk through its material equity exposure of EUR173 million. This represents 53% of its total capital and reserves (which stood at EUR329.3 million on Dec. 31, 2010). Any material deterioration in the value of the equity portfolio may significantly reduce IPB's capital resources. We also consider this to be a negative rating factor.
The negative outlook reflects that on the Republic of Ireland (BBB+/Negative/A-2). A lowering of the ratings on the sovereign will be reflected in the ratings on IPB. We also expect IPB to continue to maintain a good competitive position that will translate into strong operating performance. Specifically, we expect IPB to continue to deliver a net combined ratio of 95% or less, along with five-year rolling averages for ROR and return on equity (ROE) of 12%-20%. We also expect the company's capitalization to be maintained at its current level, or at least within a comfortable level in the 'BBB' range, based on our insurer risk-based capital adequacy model.
In addition, we will closely monitor the investment strategy IPB uses to protect its capital base. Should a material deterioration occur, we may lower the company's rating. The rating is unlikely to rise in the medium term, however, because IPB's competitive position has reached saturation, in our view, thus limiting its future growth. Any growth and diversification outside IPB's niche would be untested and may expose IPB to strong competition, in our opinion. It could also weaken the currently strong operating performance.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal.
-- Interactive Ratings Methodology, April 22, 2009
-- Counterparty Credit Ratings And The Credit Framework, April 14, 2004