TEXT-S&P Summary: Irish Public Bodies Mutual Insurance Ltd.

Rationale

The ratings reflect our view of Irish Public Bodies Mutual Insurances Ltd.'s (IPB's) very strong capitalization and strong operating performance. These factors are offset by IPB's material exposure and concentrated investment portfolio in Ireland, weak enterprise risk management (ERM) framework due to basic risk management procedures, and competitive position that, while good, has reached saturation--thus limiting growth potential.

Under our base case, for 2012-2013 we expect IPB's strong capitalization to remain a rating strength, supported by a capital adequacy ratio (measured by our capital model) at least within the 'AA' range. Basing calculations on IPB's 2011 financial data, its capital adequacy ratio sat comfortably in the 'AAA' range for that year. Capitalization is supported by a good level of reserving and adequate reinsurance coverage, which we anticipate will continue.

For 2012 and over the cycle we expect IPB to continue outperforming peers in the Irish market. We anticipate it will deliver a strong operating performance with a very strong net combined ratio (NCR) below 65%, along with at least a 20% five-year return-on-revenue (ROR) rolling average, and at least 10% for return on equity (ROE). We expect the NCR to trend upward as historically it has significantly benefited from prior year provision releases. In 2011, IPB reported very strong NCR of 23%, an ROR of 85%, and ROE of 15%. Furthermore IPB's five-year average (2006-2010) performance compares well to its peer group, with an NCR of 57% (peer average: 86%), ROR of 60% (28%), and ROE of 19% (21%).

We do not foresee any material changes in IPB's investment strategy or portfolio in the next 12-24 months. IPB is materially exposed to Ireland; total Irish exposure stands at 32%, in government bonds, corporate bonds, equities, and cash held in Irish banks (as of March 31, 2012). Irish investments represent 90% of IPB's reported capital of EUR371 million on Dec. 31, 2011. Any deterioration in the quality of the fixed income portfolio or the value of the equity portfolio may significantly reduce IPB's capital resources and weaken operating performance.

Under our base case for 2012-2013, we expect IPB's premium income will remain flat given current economic conditions in Ireland, the government's austerity measures, and our opinion that IPB's competitive position in the Irish liability market has reached saturation, limiting its future growth. Historically, it has enjoyed an unrivaled position in its core niche liability market as the insurer of choice for many of its mutual members--public bodies in its three core distinct segments: local authorities, health, and education. This enabled IPB to consistently deliver a strong operating performance and we anticipate that it will continue to do so. IPB may continue to lose some policyholders to the self-insurance mechanism, or if some of the government entities it insures are consolidated or closed as the result of austerity measures. This may reduce the size of IPB's niche market in absolute terms. Any growth and diversification outside IPB's niche would be untested and may expose it to strong competition, in our opinion. It could also weaken the currently strong operating performance.

Outlook

The negative outlook reflects that on the Republic of Ireland (BBB+/Negative/A-2). If we were to lower the ratings on the sovereign, we would also lower that on IPB. We view as unlikely a negative rating action due to a deterioration in IPB's stand-alone credit profile in the next 18-24 months. This is due to its strong capitalization; its capital adequacy ratio as measured by our risk-based capital model is in the 'AA' range, well above IPB's rating level. Its strong operating performance also enables it to replenish its capital base annually. We are unlikely to raise the rating over the forecast horizon, due to the sovereign cap.