LONDON--(BUSINESS WIRE)--AM Best has removed from under review with negative implications and downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb” (Fair) from “bb+” (Fair) and affirmed the Financial Strength Rating of B (Fair) of Universal Insurance Company (Guernsey) Limited (UIC) (Guernsey). The outlook assigned to these Credit Ratings (ratings) is negative.
The ratings reflect UIC’s balance sheet strength, which AM Best assesses as adequate, as well as its strong operating performance, very limited business profile and marginal enterprise risk management (ERM).
The downgrade of the Long-Term ICR reflects a deterioration of UIC’s balance sheet strength following the payment of a GBP 8 million extraordinary dividend to its ultimate parent, Universal Holdings (Guernsey) Limited (UHL). This has resulted in a significant reduction of the company’s capital base to approximately GBP 2.5 million, leading to heightened sensitivity of its balance sheet strength to any shocks, with its risk-adjusted capitalisation, as measured by Best's Capital Adequacy Ratio (BCAR), falling notably on an AM Best stressed basis at the fiscal year-end 30 June 2022.
The negative outlook reflects pressures on UIC’s creditworthiness associated with the uncertainty in its strategic direction as UHL restructures its operations and plans to create a new risk carrier in Gibraltar.
Since its creation in 2014, UIC has achieved strong operating performance. The company has reported a five-year (2019-2022) weighted average return-on-equity ratio of 33.3%. Earnings are derived primarily from the company’s underwriting profitability, as seen in its five-year weighted average combined ratio of 19.8%, whilst the very conservative and highly liquid investment portfolio produces marginal but stable returns.
UIC’s underwriting book of business is highly concentrated, as it operates in a single line of business in a single territory. In addition, AM Best views UIC’s business model to be vulnerable to potential changes in the U.K. motor market.
UIC’s ERM framework is considered evolving. The marginal ERM assessment factors in the high risk profile stemming from UIC’s business model, which involves significant concentration risk.
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