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Fitch Ratings : affirms Sterling Insurance and Sterling Life at ‘BBB+’ with a stable outlook

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Fitch Ratings has affirmed Sterling Insurance and Sterling Life 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 (Sterling).

The affirmation reflects Fitch’s expectation that the capital position of Sterling SICL and SLL will remain stable and supportive of the ratings.

Sterling demonstrated strong profitability in 2011, driven by continuous improvement in its underwriting performance and growth in administration income. Sterling’s net income increased to GBP3.6m in 2011 from GBP0.5m in 2010, and its combined ratio improved to 96.0% from 102.4%. Fitch expects continued improvements in underwriting margins.

Fitch views Sterling’s growth of administration income relating to the management of credit insurance accounts as a marginal positive for the ratings. This income provides diversification and strengthens the bottom line. The group does not assume any underwriting risk on these policies.

Fitch regards Sterling’s investment risk as acceptable for the ratings. Although its investment portfolio is somewhat riskier than peers due to relatively high exposure to corporate bonds, this is mitigated by good credit quality and strong capitalisation.

Sterling is a niche UK insurance company that has established a respectable franchise with a strong distribution network. However, it remains a small player in what is still a challenging market. Its lack of scale and heavy concentration in the UK make it more difficult to control pricing, access external finance and absorb a potential fall in demand for its products. Fitch views Sterling’s scale and operating profile as rating constraints and considers an upgrade unlikely in the near to medium term.

Key rating triggers for a downgrade include a change in dividend policy resulting in significant capital extraction. A significant deterioration of underwriting performance and/or poor investment results leading to a depletion of capital would also put downward pressure on the ratings. Fitch would be concerned if the group reported a Fitch-calculated combined ratio in excess of 105%. In addition, the introduction of further risk into the investment portfolio could create negative rating pressure.