Fitch Affirms `AA-' IFS Rating of AEGIS with Negative Rtg Outlook.Business Editors CHICAGO--(BUSINESS WIRE)--June 8, 2001 Fitch affirmed the `AA-' insurer financial strength rating of Associated Electric & Gas Insurance Services Limited (AEGIS) and changed the Rating Outlook from Stable to Negative. The Negative Rating Outlook reflects continued poor operating results, deteriorating underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. and operating cash flows Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. , uncertainty associated with the growing Lloyd's Syndicate business, and uncertainties with respect to potential California utility exposure. The very strong insurer financial strength rating of AEGIS continues to be supported by the company's strong market position, favorable capitalization profile, and conservative approach to setting loss reserves. The very competitive and consolidating nature of the utility and related energy industry, coupled with the `soft' pricing environment has led to weak profitability and cash flow strain with operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. in decline since 1997 and negative operating cash flow in 1999 and 2000. AEGIS Energy Syndicate 1225 at Lloyd's commenced writing business in 1999 as the primary vehicle for the company to participate in the international market. Although currently relatively small at about 17% of total company net premium written in 2000, AEGIS expects this business to become a more significant part of the company going forward with the ultimate objective of becoming a leader in the international energy business. While AEGIS will be challenged in the near term to turn this into a profitable business, long-term results should be more favorable as operating effectiveness and efficiency improves, but this still remains uncertain. AEGIS' exposure to the energy crisis in California primarily relates to the potential for lawsuits by consumer groups, suppliers, creditors, shareholders, or other injured parties Noun 1. injured party - someone injured or killed in an accident casualty victim - an unfortunate person who suffers from some adverse circumstance against the directors and officers of the insured-member utility companies that have D&O liability coverage with AEGIS. Although the ultimate impact of the California utility crisis to AEGIS may take several years to be completely known, any future rating actions will be based on a detailed analysis of AEGIS' range of potential exposures, both gross and net of reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. , related to the crisis. In addition, AEGIS has significant pollution exposure related primarily to claims associated with hazardous waste Hazardous waste Any solid, liquid, or gaseous waste materials that, if improperly managed or disposed of, may pose substantial hazards to human health and the environment. Every industrial country in the world has had problems with managing hazardous wastes. resulting from manufactured gas man·u·fac·tured gas n. A gaseous fuel made from soft coal or various petroleum products. plants sites, which under Superfund legislation retroactively ret·ro·ac·tive adj. Influencing or applying to a period prior to enactment: a retroactive pay increase. [French rétroactif, from Latin imposed liability on AEGIS. Although Fitch believes that AEGIS has a reasonably good handle on its potential environmental liabilities, the possibility of additional significant environmental exposure still exists due to inherent uncertainties that surround environmental issues. AEGIS has built a reputation in the utility and related energy industry for consistently providing coverage and services in both hard and soft markets and through various changes and crises in the risk environment. The company has been rewarded with high market penetration Noun 1. market penetration - the extent to which a product is recognized and bought by customers in a particular market penetration - the act of entering into or through something; "the penetration of upper management by women" and a high member retention rate. AEGIS' strong market niche is viewed as a positive though lack of diversification may expose the company more to adverse market conditions or to industry- specific issues that may emerge relative to a more diversified carrier. Fitch believes that AEGIS has a strong capital position as evidenced by its low operating leverage Operating Leverage A measurement of the degree to which a firm or project relies on fixed rather than variable costs. Notes: The higher the degree of operating leverage, the greater the potential danger from forecasting risk. and favorable surplus growth. This in conjunction with AEGIS' overall conservative loss reserving philosophy are viewed by Fitch as key factors supporting the rating, given that the company has exposures that are inherently volatile. Entity/Issue/Type Action Rating/Outlook Associated Electric & Affirmed `AA-'/Negative Gas Insurance Services Limited --Insurer financial strength |
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