The outlook for both ratings is stable.
The ratings recognize ERCL's strong risk-adjusted capitalization, historically favorable operating performance and prudent risk controls. The ratings also consider ERCL's role as the pure insurance captive of
Over the past years, ERCL's operating performance was mainly supported by a favorable underwriting performance as well as interest income earned from deposits and loans to group affiliates. Although it is anticipated that ERCL will continue to maintain favorable operating performance going forward, the overall profitability is expected to be lower than that of its historical level, partly due to the gradual depletion of redundant reserves relating to the third party business. The prevailing low interest rate environment will continue to suppress the company's investment return over the short to medium term.
ERCL plays an integral part within the risk management framework of the group by providing insurance and reinsurance protection as well as risk control services to the operating entities within the group. ERCL consistently maintains a prudent underwriting approach. While ERCL has a large gross underwriting exposure due to its high insurance limits on aviation and marine-related risk, its net retained limits are maintained at a manageable level relative to its capital and surplus.
Partially offsetting these positive rating factors include the potential capital demand from ERCL's affiliated companies within the group and the potential credit risk associated with the large risks on marine and aviation that are ceded to reinsurers. Notwithstanding, the associated credit risk is partially mitigated through the use of financially sound reinsurers.
ERCL's risk-adjusted capitalization, although strong, has exhibited some volatility mainly due to the financial support provided to its affiliated companies in the form of bonds and loans investments, in addition to large dividend payments over the past five years.
While positive rating actions are unlikely in the near term, negative rating actions could occur if ERCL exhibits unfavorable operating performance and/or a significant decline in its risk- adjusted capitalization. In addition, a significantly weakened business and credit profile of the group could negatively impact ERCL's ratings.
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