Standard & Poor’s Ratings Services today said it affirmed its unsolicited public information (pi) insurer financial strength and counterparty credit ratings on Danish non-life insurer GF-Forsikring A/S (GF) at ‘BBBpi’.
The ratings predominantly reflect our view of the company’s fair business risk profile, mainly driven by a limited competitive position and operating underperformance relative to domestic peers, and an upper adequate financial risk profile, based on its moderately strong capital and earnings. The company’s strong capital adequacy, partially offset by the small absolute size of its capital base, supports its moderately strong capital and earnings. We combine these factors to derive a ‘bbb’ anchor for GF.
GF faces low industry and country risk, in our view, because it writes its business solely in the stable Danish non-life market, characterized by favorable profitability. Still, we believe that the currently low interest rates and volatile financial markets could strain earnings. While we recognize moderate product risk exposure for the Danish non-life sector, we consider that GF carries higher product risk in its accident and health activity, based on its poor results over the past five years.
We view GF’s competitive position as less than adequate. GF writes its business through 67 insurance clubs, which collectively own GF. The company enjoys a unique business feature, as only motor policyholders become members of their respective insurance club, and profits made on motor insurance are paid back to members in the form of discounts and rebates. Gross premium written (GPW) increased by 1.5% to Danish krone (DKK) 1.53 billion in 2012 (€205.6 million). GF writes all its business in its domestic market, albeit with a diverse business mix. In 2012, motor liability represented 23% of GPW, motor damage 20%, property and casualty 42%, and accident and health 14%.
We regard the company’s capital and earnings as moderately strong. Over 2013-2015, we expect GF to maintain its capital adequacy above our benchmark for the ‘A’ level, based on our risk-adjusted capital adequacy model. However, due to the small absolute size of its capital base, the company is susceptible to volatility in its capital adequacy. Net income rose to DKK119 million from DKK17 million in 2012, driven by a favorable combined ratio (loss and expense) of 98% (against 101.3% in 2011), and increased net unrealized gains of DKK60 million. The combined ratio would have been about 6 percentage points lower than reported excluding the company’s material reserve strengthening in 2012. We view the underwriting performance as moderate, based on GF’s five-year average net combined ratio of 101.8%. Its five-year average return on equity is low at 2.5%. In the past five years, GF posted technical losses in accident and health, except in 2009, when it reported a technical profit.
We believe that regulatory capital remains well above intervention levels, given that in 2012 GF reported its regulatory solvency requirements as covered by a multiple of 5x and its individual solvency requirements, based on Solvency II principles, as covered by a multiple of 3.1x. In our view, the company’s technical reserves are adequate. Loss reserves covering net premium written improved to 72.3% in 2012, from 65.1% in 2011. We note that the company experienced a significant reserve run off loss of 9% in 2012 (after -2.3% in 2011, 2.7% in 2010, 0.8% in 2009, and -1.6 in 2008). The company makes limited use of reinsurers, with a reinsurance utilization ratio of 2.3% for 2012 against 3.4% in 2011. GF states that it uses only reinsurers with at least an ‘A’ rating from Standard & Poor’s.
In our view, GF’s risk position reflects moderate risk, based on low volatility in underwriting results but high investment risk. However, its loss ratios are traditionally relatively high, ranging between 77% and 86% over the past five years. Investment risk is also high, evidenced by GF’s substantial equity-type investments amounting to 16.8% of its invested assets. In our view, the equity investments bear inherent and sizable market risk, which exposes the company to volatility in capital and earnings. Still, we view favorably the company’s efforts in asset derisking under which it reduced its equity investments to the current 16.8% from 42.4% in 2010. In 2012, the company invested 74% of its invested assets in bonds, 6% in cash and cash equivalents, and 2.4% in real estate.
We consider GF’s financial flexibility to be adequate. The company’s access to external sources of capital is limited because of its mutual-like structure. However, we factor in GF’s track record to tap credit facilities from its house bank. Total debt increased to DKK52 million in 2012 from DKK27 million in 2011, translating into a relatively low financial leverage ratio of 4.5% compared with 2.7% in 2011.
