CBL Insurance disappointed with S&P rating cut

BUSINESSDESK: CBL Insurance, which offers insurance products ranging from builders’ bonds to travel and cargo underwriting, says it is disappointed with the decision by Standard & Poor’s to cut its credit rating after the acquisition of a European business last year.

S&P credit analyst Lucy Huynh has lowered CBL’s rating by two notches to BB- with a negative outlook, saying its acquisition last year of London-based European Insurance Services eroded the company’s financial risk profile and increased its exposure to “a weakening European economy”.

CBL acquired EISL for an undisclosed multi-million dollar sum in 2011, gaining a specialist provider of residential builders' warranty insurance in France and Spain.

The purchase helped lift premium revenue to $104.6 million in 2011 from $41.4 million in the previous year. It also generated $31.7 million of goodwill and $7.1 million of deferred acquisition costs, according to the company’s 2011 accounts.

“The acquisition [of EISL] has been highly successful, and the company continues to exceed expectations and forecast across all areas of our business,” CBL said.

The company changed its name last year from Contactors Bonding Ltd, a company founded in 1973, and describes itself as “the largest and oldest provider of credit surety and financial risk in New Zealand”. It conducts 97% of its business outside of New Zealand.

When S&P first assigned a BB+ credit rating in May 2010 it cited CBL’s “strong and consistent underwriting performance, well-defined and managed business strategy, and supportive capital and reinsurance arrangements”.

Risks included “somewhat limited” financial flexibility bwcause of its small private shareholder base, S&P said at the time. The company’s principals were described as “entrepreneurial yet conservative”.

CBL Insurance is privately owned, with the majority shareholders in New Zealand.

In its latest report, S&P said the credit rating outlook could be returned to stable if CBL strengthened its capitalisation and showed a sustainable boost in competitive position and operating performance as a result of buying EISL.

The negative outlook reflected S&P’s judgment that it would take CBL some time to build up sufficient capital through retained earnings.

S&P also said there was “a reasonable probability that the company will not be able to achieve its forecast earnings because of its increased exposure to a weakening European economy”.

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