• Following a review of Sweden-based ERV Forsakringsaktiebolag under our revised insurance criteria, we are affirming our public information ‘BBBpi’ ratings on the company.
• The ratings reflect our view of the company’s fair business risk profile and lower adequate financial risk profile.
Standard & Poor’s Ratings Services today said it affirmed its unsolicited public information (pi) insurer financial strength and counterparty credit ratings on Swedish non-life insurer ERV Forsakringsaktiebolag (publ) (formerly Europeiska Forsakringsaktiebolag [publ]) at ‘BBBpi’.
The ratings predominantly reflect our view of the company’s fair business risk profile and its lower adequate financial risk profile. We base our assessment of ERV Forsakring’s business risk profile on its low industry and country risk and less-than-adequate competitive position. As regards its lower adequate financial risk profile, we take into account our view of its lower adequate capital and earnings, intermediate risk position, and adequate financial flexibility. We derive a ‘bbb-‘ anchor for ERV Forsakring from the combination of these factors. The ratings on the company are ‘BBBpi’, as our public information ratings generally do not bear plus or minus modifiers.
ERV Forsakring is a small Swedish specialist in the corporate and leisure travel insurance market, with a Swedish market share of 0.6% in 2012. The company is a wholly owned subsidiary of Germany-based travel insurer Europaeische Reiseversicherung AG (ERV, not rated), which is in turn fully owned by German primary insurance group ERGO (core entities rated AA-/Stable/–). Munich Reinsurance Co. (AA-/Stable/–) is the ultimate parent of the group. We view ERV Forsakring as nonstrategic to its parent.
ERV Forsakring faces low industry and country risk, in our opinion, because its business stems primarily from the stable Swedish non-life insurance market. The market is characterized by favorable profitability, although we believe that low interest rates and unrest in the financial markets could strain ERV Forsakring’s earnings. The Swedish non-life sector also has high barriers to entry. Product risks are neutral, in our view, with moderate exposure to natural catastrophes, evidenced through harsh winters and increased weather-related claims in recent years. However, as a niche travel insurer ERV Forsakring is exposed to product-related risks for business written outside Sweden.
We view ERV Forsakring’s competitive position as less than adequate because it is constrained by lack of scale as well as limited product and geographic diversity. Still, we expect the company to maintain its presence in its niche market. In 2012, gross premium written decreased by 7% to Swedish kronor (SEK) 424 million (€49 million) from SEK458 million in 2011. Product restructuring in the leisure travel segment was the main driver behind the decline. We expect this trend to continue in 2013 as the company has announced significant re-underwriting.
We assess ERV Forsakring’s capital and earnings as lower adequate. We expect the company to maintain its capital adequacy at the benchmark for the ‘A’ rating category, based on Standard & Poor’s risk-adjusted capital adequacy model. We also factor in a high degree of potential capital volatility due to the company’s small capital base, which, in 2012, was strained by a reduction in equalization reserves of SEK7.7 million to cover losses. We believe regulatory capital exceeds intervention levels, since the solvency ratio remained stable at 2.3x in 2012. In our base case we assume that the company’s reorganization and re-underwriting will improve the recent negative earnings trend.
In our view, ERV Forsakring’s risk position is intermediate. In 2012, 93% of total invested assets were allocated to Swedish government bonds and other interest-bearing securities rated ‘AAA’. Furthermore, almost 6% of its invested assets were in cash and cash equivalents. We assume in our base case that this conservative asset allocation will remain based on the company’s historical stability.
We consider ERV Forsakring’s financial flexibility to be adequate, partly given the company’s debt free balance sheet and its sound shareholder structure.
