21 March 2016Actuarial & underwriting

Moody’s downgrades Stein’s IFSR

Moody's Investors Service has downgraded the insurance financial strength rating (IFSR) of Stein Insurance Company to A3 from A2. The outlook on the rating is negative.

Stein is a Guernsey-based core captive insurance subsidiary of Melbourne firm BHP Billiton, the multinational mining, metals and petroleum company.

The rating concludes the review for downgrade initiated on December 24, 2015. The downgrade is driven by the recent downgrade of the issuer ratings of BHP Billiton and BHP Billiton to A3 from A1 on March 3, 2016 with a negative outlook, according to Moody’s.

The downgrade of BHP Billiton and BHP Billiton reflects the deterioration in the company's earnings and cash flow, which has led to significantly weaker credit metrics.

Stein’s rating encapsulates its risk management and controls, which are aligned with those of its parent as well as the capital support that has been provided by BHP Billiton in previous years. Moody's views Stein's credit profile as being closely aligned to the issuer rating of BHP Billiton.

In addition, Stein's A3 IFSR reflects its low risk balance sheet, underlined by the credit quality of its assets, lack of financial leverage and high levels of capital. These strengths are somewhat offset by the potentially volatile nature of the company's business profile and underwriting risks, which are linked to the parent's operations. Claims experience can be volatile due to the potential for large risks to emerge.

Stein's rating is also supported by the linkages with its parent and consider the close alignment of risk management and risk mitigation processes and the potential for Stein to receive financial support from its parent if required.

The outlook of Stein is negative, in line with the negative outlook of BHP Billiton.

The outlook would likely return back to stable if the outlook for BHP Billiton returns to stable, according to Moody’s.

Given that the credit profile of Stein is highly linked to that of its parent, Moody's would consider upgrading Stein's rating only if BHP Billiton's rating is upgraded. Similarly, Stein's rating could be downgraded if BHP Billiton were to be downgraded.

Additionally Stein could be downgraded if: there is any indication of a decline in the degree of support from the group and it starts writing third party businesses; there is material additional risk exposures without a commensurate increase in capital; there is a significant deterioration in profitability due to large industrial and catastrophe losses.