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S&P : Pinnacle Insurance outlook revised to stable

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Standard & Poor’s announced that it revised to stable from negative the outlook on Pinnacle Insurance. At the same time, the ‘BBB+’ long-term counterparty credit and insurer financial strength ratings has been affirmed.

Here is Standard & Poor’s report :

Operating performance at U.K.-based non-life insurer Pinnacle has stabilized in 2011 after three consecutives years of losses. The decline in profitability has slowed and the pressure it put on the rating has abated, in our view. Any future volatility in earnings will be mitigated through profit-sharing treaties with third-party distributors, the ability to reprice at short notice, and the inclusion of robust clauses to limit risk exposure in the terms and conditions of agreements with distributors.

The ratings on Pinnacle reflect the company’s strong capitalization and its conservative, liquid investment strategy. In addition, Standard & Poor’s considers Pinnacle to be moderately strategic to the BNP Paribas (BNPP, AA-/Stable/A-1+) group, and, as a result, we incorporate one notch of implied group support in the ratings. These strengths are partially offset by Pinnacle’s concentrated business profile, the execution risks associated with diversification of the company’s product range, and ongoing earnings recovery to achieve group’s targets.

Although Pinnacle is small compared with the overall group, we consider it to be moderately strategic to the BNPP group. It is important to the group’s long-term strategy, helping it to maintain a presence in one of its key European markets–the U.K. In our view, the group would likely support Pinnacle should it fall into financial difficulty, and it is increasingly integrated into the group.

Despite returning to profitability, Pinnacle has yet to achieve the levels of operating performance the group expects. Supported by increasing risk appetite from its board, Pinnacle is now looking to diversify its business position into other lines of business; however, we see execution risks associated with this strategy because the company does not have proven expertise in some of the targeted lines and market conditions remain very competitive.

The stable outlook reflects our view that earnings at Pinnacle have stabilized after a period of adverse market conditions and a revamp of the company’s strategy, and are likely to start growing again. The underlying loss ratio on the core protection business is returning to prerecessionary levels. This suggests that operating performance is likely to be profitable in the next two to three years, and we do not expect the losses experienced in 2008-2010 to repeat. It also reflects our expectation that Pinnacle will deliver on its strategy to diversify into other business lines profitably. That said, we do recognize the execution risks associated with expanding its product offering.

A negative rating action may follow any radical changes in strategy, failure to generate profits in 2011 and 2012, or failure to increase control of product distribution. These triggers may also lead us to review Pinnacle’s group status in BNPP and the level of support included in its rating.

Positive rating action is not likely over the rating horizon unless Pinnacle substantially improves profitability against group’s targets and establishes a track record of sustainable good earnings, while maintaining the current risk and capital profile.

Source : Standard & Poor’s