London – (work wire) –better morning Confirmed the financial strength rating (FSR) of B (fair) and the long-term issuer credit rating (Long-Term ICR) of “bb+” (fair) for Folgate Insurance Company Limited (Folgate) (UK). The outlook for FSR is stable, while the outlook for long-term ICR is negative.
These credit ratings (the ratings) reflect the strength of Folgate’s balance sheet, which AM Best rates as adequate, as well as its adequate operating performance, very limited business profile and appropriate enterprise risk management (ERM).
The negative outlook on the international outlook for long-term interest rates reflects pressure on the assessment of the company’s balance sheet strength caused by deteriorating risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), and weak operating performance.
The strength of Volgate’s balance sheet is underpinned by its risk-adjusted capitalization, as measured by BCAR, which is expected to at least remain at the strong level. Risk-adjusted capitalization deteriorated in 2020 after significant operating losses, having been marginally at the very strong level at the end of 2019, and is expected to recover in 2021. The balance sheet strength assessment takes into account Vulgate’s small capital base, which Enhances risk-adjusted capitalization sensitivity to any shocks. The impact of the ultimate parent company, Anglo London Limited (ALL), on its balance sheet strength assessment has been adjusted to neutral from negative, reflecting the improvement of ALL’s risk-adjusted consolidated capitalization, as measured by BCAR, and reduced leverage.
AM Best expects Folgate’s operating performance to remain at an appropriate level over the cycle, supported by marginal underwriting earnings, based on a solid track record of business acquired through its subsidiary managing agent, Anglo Pacific Consultants (London) Limited (APC), and modest. Investment income, which reflects a conservative asset allocation after the company’s recent portfolio risk reduction. Folgate reported -14% return on equity in 2020, due to the impact of large one-time technical losses and negative investment gains from divestment from equity investments in the context of market volatility associated with the COVID-19 pandemic. Folgate is expected to report marginal operating profit in 2021.
Vulgate’s underwriting business book is highly concentrated by product and geography. In addition, AM Best views Folgate’s position in the competitive UK market as being weak and highly dependent on third parties. This is mitigated in part by APC’s underwriting experience and existing broker relationships.
Vulgate’s risk management framework is largely dependent on UK regulatory requirements. While the company’s risk management capabilities are widely considered to be commensurate with its risk profile, AM Best will continue to monitor whether underwriting losses in recent years are evidence of potential weaknesses in ERM.
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