Credit rating downgrade: a bad news! In January 2015, PACRA marked down Universal Insurance's Insurer Financial Strength (IFS) rating to BBB- (triple B minus) with negative outlook. The insurer's previous rating was BBB+ (triple B plus). The downgrade is an outcome of the company's deteriorating business and financial risk profile whereby shrinking premiums make the company vulnerable to high loss ratios, according to PACRA.
DETERIORATING FINANCIAL PERFORMANCE: Universal's financial performance has been daunting its fate for quite some time now. Premiums are plunging, underwriting profits are turning into losses and bottom line losses just keep on growing.
Coming to the first quarter ending March 2015, the ill-fate of the company didn't transform either. Although bottom line grew massively by over 12 times during the quarter, the growth is not attributable to the improvement in its operational performance rather it is the outcome of some recoveries booked on claims expenses. Taking clue from the director's report, these claims were closed which according to the management would not be payable, after consulting with the legal committee.
However, such recoveries are one-offs and cannot be regarded as a permanent source of bottom line growth. To get sustainable profitability growth, core operations need to be strengthened which means strengthening premiums and controlling claims expenses. Unfortunately, this has been the weak spot of the company. And it's the infirmity in building up the firm's strength that its credit rating has deteriorated.
GOING ONWARDS: Universal Insurance's deterioration in financial performance is written all over the company's financials. The management has a lot on the table to bring company's operations and profitability on the right path. Needless to say, the survival of any company is dependent on the strength of its business and financial performance but in the case of Universal Insurance, surely there lies many question marks at this stage.
Premium growth has remained dismal and the tale of its underwriting profits is no different either. It should be noted that the regulator is being active and the regulations are being made stringent. Capital requirements have been increased and sources opine that it will be increased further in future years.
Although the company is fulfilling the current capital adequacy requirement, meeting the proposed requirements might strain the company's positioning further. However, becoming the target of mergers or acquisitions might result in a good bargain for its stakeholders. Nonetheless, a higher capital base would fare well for the company in terms of better risk absorption capacity, greater resources to expand its market share, investment in technology and introduction of new products.
But to revamp the company, the need to have quality human resources on board cannot be ignored as the loopholes at grass-root levels have to be fixed first. Once the operations are streamlined, rising premiums would eventually lead to boosting the profitability growth of the insurer. Mind you, prudent risk policies should remain at the core as escalating claims expenses carry the risk of eating away the gains arising from top line growth.