MOODY'S UPGRADES COMMERCIAL UNION'S P&C INSURANCE AND LIFE ASSURANCE FINANCIAL STRENGTH RATINGS AND SENIOR DEBT RATINGS TO Aa2
Moody's Investors Service has upgraded the insurance financial strength ratings of Commercial Union Assurance Company plc (CU Assurance) and of Commercial Union Life Assurance Company Limited (CU Life) to Aa2 from A1. Moody's has also upgraded the senior unsecured debt issued by CGU plc and guaranteed by CU Assurance to Aa2 from A1. Finally, Moody's has changed the rating outlook of the CU Assurance and General Accident and Life Assurance Corporation plc (GA Fire) to positive. The rating actions conclude Moody's review of Commercial Union's ratings which was initiated in February of this year after the company announced that it intended to merge with the UK composite insurer General Accident plc.
These rating actions reflect Moody's views about the strong management team at the combined group; the robust position of the CGU subsidiaries in the main markets where they operate; the existing legal structure; the dilution of financial leverage; and the cost and revenue benefits that are expected to accrue to the new group as a result of its combined operations. Notwithstanding the likely deterioration in results in 1998 and the exposure to weather-related losses on its main markets, the positive outlook is assigned in anticipation of further long term gains that may be achieved, above and beyond the stated goals of œ270 million p.a., within the context of CGU's current underwriting risk profile, financial leverage and operating performance. The ratings are mitigated by the expectation that management will manage the capital base more aggressively than in the past.
Expanding on its rationale, Moody's stated that CGU's companies offer a broad range of general insurance products to personal and commercial clients primarily in European and North American markets, have avoided writing speciality liability lines and have reduced their exposure to large risk business. With a few exceptions, the CGU P&C operations have a relatively low-risk profile. The main risks are reinsured with a panel of highly-rated reinsurers. Through CU Assurance's and GA Fire's subsidiaries, CGU has achieved prominent positions in the United Kingdom, Canada, the United States, France, Australia, New Zealand and the Netherlands. Most of these operations are profitable and relatively well-positioned in their markets; hence, Moody's expects management to focus on improving the operating performance of its P&C subsidiaries rather than using the existing base as a platform for renewed geographic expansion.
The legal structure is relevant to the ratings because under the existing legal structure, most of the groups' companies are subsidiaries of either CU Assurance or GA Fire, which thus benefit from their own operations and from these companies dividends. The disadvantage of this arrangement is the resulting double leverage of the UK operations.
Moody's added that the concern regarding financial leverage at the former CU Group had now lessened due to greater source-of-cash flow diversification, good earnings quality and a larger capital base of CGU. On a pro-forma basis, the combined group would have reported close to œ900 million (US$ 1.4 billion) in pre-tax profit in 1997, excluding realised gains, and shareholders' funds of approximately œ8 billion (US$13.3 billion). This compares to debt, at year-end 1997, of approximately œ1 billion (US$1.7 billion).
These strong fundamentals are mitigated by the expectation of a more aggressive capital management, which could limit capital formation, and the potential for increased business retention, which could result in greater earnings volatility.
Regarding the life assurance operations, Moody's said that the upgrade of CU Life takes account of its planned merger with General Accident's UK long-term fund. The combined business should be in a position to realise substantial economies of scale and cost savings, although this is tempered somewhat by the lack of overlap in non-UK markets, the rating agency said. Moreover, realisation of cost savings will likely represent a significant operational challenge in current market conditions. Finally, the rating agency noted the core long-term position of the life franchise within the context of the CGU Group as a whole, and its significant contribution to group earnings. As such Moody's believes that the ongoing capital needs of the combined life business, both from a regulatory and business perspective, should continue to be underpinned by support of its parent and the group overall. The merger of the main UK long-term funds is not scheduled for completion until January 2000, but the marketing efforts and product line have already been co-ordinated under the CGU Life banner. Upon completion CGU's combined UK long-term fund would rank among the top ten UK life companies by assets and be complemented by significant life operations in the Netherlands and France.
The following ratings have been upgraded:
Commercial Union Assurance Company plc -- Aa2 for insurance financial strength.
CGU plc -- Aa2 for senior unsecured debt guaranteed by CU Assurance.
Commercial Union Life Assurance Company Limited (long-term fund) -- Aa2 for insurance financial strength.
The following ratings have been confirmed:
CGU plc -- Prime-1 for short-term debt, guaranteed by CU Assurance.
CU France S.A. -- Prime-1 for short-term debt.
General Accident Fire and Life Assurance Corporation plc -- Aa2 for insurance financial strength.
CGU Life Assurance Limited (Long-Term fund), formerly General Accident Life Assurance Limited (Long-term fund) -- Aa2 for insurance financial strength.
CGU Linked Life Assurance Limited (Long-term fund), formerly General Accident Linked Life Assurance Limited (Long-term fund) -- Aa2 for insurance financial strength.
The following ratings remain under review for possible upgrade:
Commercial Union Lenders Mortgage Insurance Corporation -- A3 for insurance financial strength.
CGU plc (formerly Commercial Union plc) is the ultimate holding company of a group with significant property and casualty insurance and life assurance operations in some of the largest industrialised countries in the world. At the end of trading day on 6th November, CGU reported a market capitalisation of œ12 billion. Most insurance operations are owned by CU Assurance and GA Fire, the exception being the life assurance operations of the former GA Group, which are held directly by General Accident plc, a subsidiary of CGU plc. The combined group manages over œ100 billion in assets (US$ 166 billion), and writes consolidated P&C insurance premiums of œ9 billion (US$15 billion) and life assurance premiums of œ7 billion (US$ 12 billion). CGU plc and CU Assurance are based in London, England.
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