Fitch Affirms Provinzial NordWest's Insurance Entities at IFS 'AA-'; Outlook Stable
KEY RATING DRIVERS
The ratings reflect Fitch's view of WPV and PNWL as core entities of the German Provinzial NordWest (PNW) insurance group, which we consider as an integral part of the German savings bank group Sparkassen-Finanzgruppe (Sparkassen) (SFG; A+/Stable). The ratings of WPV and PNWL benefit from their ultimate ownership by SFG.
On a standalone basis, PNW is strongly capitalised, has prudent reserving methods and has consistently reported strong underwriting performance at least over the last five years. Less positively, the significant share of home insurance in PNW's non-life business exposes the group to windstorm damage, although this is mitigated by adequate reinsurance. Its regional focus on north-west Germany limits its geographical diversification and growth potential.
PNW's strong market position in its regional market is supported by its extensive agency network and its distribution of products through SFG banks. Its ability to attract single premium business also benefits from the company being a member of SFG.
Fitch expects PNW's investment return rate to have been around 4% in 2014 (2013: 4.2%). We expect a further decline in investment return for 2015, driven by continued low investment yields. We expect PNW's reported net income to have decreased in 2014, but to have been more than EUR100m (2013: EUR130m). We expect slightly lower net income in 2015 because of continued low investment yields.
In 2013, the German non-life insurance industry suffered exceptionally high claims from natural catastrophes, far exceeding the long-term-average. This trend continued for the home region of PNW in 2014. Fitch expects reinsurance to have been adequate in 2014 and PNW to report a small consolidated net underwriting result (2013: EUR22m).
WPV's net combined ratio weakened to a preliminary 97.7% in 2014 from 92.2% in 2013, which is worse than Fitch's expectation for the German non-life market of 95% (2013: 99.2%). Fitch expects WPV's net combined ratio to improve significantly in 2015 if natural catastrophe activity returns to the long-term-average.
PNWL's gross written premium (GWP) increased to EUR2.1bn in 2014 from EUR1.5bn in 2013 as single premium business grew to EUR1.2bn from EUR0.5bn. PNWL's new business measured by annual premium equivalent (APE, annual premium + 1/10 single premium) grew 67.3%.
PNW had total assets of EUR22.7bn at end-2013 and reported GWP of EUR3.2bn in 2013. The group includes one life and three non-life insurers, of which WPV and PNWL form the main pillars.
RATING SENSITIVITIES
As Fitch regards PNWL and WPV as an integral part of SFG, changes to SFG's rating are likely to be reflected in the insurers' ratings.
In addition, a downgrade of PNWL's and WPV's ratings could be triggered by an adverse change in Fitch's view of the strategic importance of public sector insurers within SFG or of PNWL and WPV within PNW. Such a change in view is unlikely in the near- to medium-term but could result, for example, from a severely depleted capital position at PNWL and WPV.
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