Fitch Ratings has revised UK travel bond insurer Travel & General Insurance Company plc’s (TGIC) rating Outlook to Stable from Negative and affirmed its Insurer Financial Strength (IFS) Rating at ‘BBB-‘.
The change in Outlook and affirmation reflects the stabilisation of TGIC’s Fitch risk-adjusted capital assessment at end-October 2010 (FYE10), at a level that is supportive of the current rating, as well as a marginal improvement in TGIC’s earnings. The agency also views TGIC’s experienced management team, disciplined underwriting approach, long-established client relationships and conservative investment portfolio as positive rating factors.
Fitch also views positively TGIC’s decision in 2010 to cease writing its unviable loss-making travel insurance book, at a time when demand for TGIC’s historically profitable travel bond insurance has stabilised at a viable level. The revision of the Outlook to Stable reflects Fitch’s expectations that TGIC’s capital and earnings will remain supportive of the current rating level.
The stabilisation of TGIC’s Fitch risk-adjusted capital reflects a modest increase in shareholders’ equity, which increased 4.5% through retained earnings to GBP6.2m at FYE10. As for FY09, the company did not distribute any dividends in respect of FY10. Fitch expects that equity will to continue to grow in line with profitability in the near term.
The company achieved a profit of GBP267k in FY10, compared with a loss of GBP484k in FY09. While the return to profitability in FY10 was helped by a reduction in claims costs related to major losses, Fitch notes that the company also reduced its exposure to poorly performing clients for the financial protection (travel bond insurance) and travel insurance books. Gross written premium (GWP) subsequently reduced by 4.2% in FY10, in contrast to a 20% increase in FY09. For FY11, TGIC has also lowered the retention on its travel protection reinsurance programme to GBP500k (previously GBP750k) to reduce volatility from future large losses. Fitch believes this will help to stabilise future income to a certain extent, although the company remains exposed to large individual claims.
The travel insurance business had been loss making since the insurer diversified into this area following the introduction of the ATOL Protection Contribution (APC) in 2008. While the introduction of the APC reduced demand for TGIC’s core travel bond product, demand has now stabilised to a level that Fitch considers to be viable. The agency believes that TGIC will have a greater ability to generate improved earnings by focusing on a core business where its expertise lies. On the other hand, Fitch notes this means that the company is exposed to the inherent risks of being a “monoline” organisation with significant dependence on one line of business.
Fitch believes that the travel industry is more greatly exposed to recessionary effects than many other insurance lines, although this is partly mitigated by TGIC’s prudent underwriting approach as well as its long-established client relationships.
Key rating drivers that could lead to a downgrade include a significant fall in business written, a deterioration of underwriting margins or a weakening of TGIC’s capital position (for example through the triggering of one or more large travel bonds).
Fitch’s considers an upgrade as unlikely in the near to medium term given the risk profile of the company’s insurance portfolio and challenging market conditions. Positive rating pressure could come from a substantial strengthening of TGIC’s capital position, which would be most likely to come from a sustained growth in earnings.
Source : Fitch Ratings Press Release