Fitch Affirms Provinzial NordWest's Insurance Entities' IFS at '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 an integral part of the German savings bank group Sparkassen-Finanzgruppe (Sparkassen) (SFG: Issuer Default Rating (IDR) A+/Stable). WPV and PNWL's ratings benefit from their ultimate ownership by SFG. We align their implied IDRs with SFG's IDR.
PNW is fully owned by SFG and public-sector institutions. PNW's insurance activities form a core part of SFG's product offering to its customers in a specified large geographical area. For example, two-thirds of PNWL's life business is sold by SFG. In addition, PNW's brand and agency network is closely linked to SFG banks. Fitch thus considers PNW the insurance arm of SFG in its region of operations and believes that there is a high probability that SFG would provide support for it if the need ever arose.
On a standalone basis, PNW is strongly capitalised, has prudent reserving methods and has consistently reported strong underwriting performance over at least the past 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.
We expect net income to increase in 2016 as the introduction of deferred funds for future appropriation in 2015 acted as a one-off drag to earnings. Due to an expectation that expenses will be incurred to offset pension deficits, we anticipate stable to slightly declining net income from 2017 onwards compared to that reported in 2015.
Fitch expects that PNW's life underwriting result will remain low and that the net combined ratio will remain below 97% in 2016. In 2015 PNW reported decreased net income of EUR83m (2014: EUR102m), reflecting a strong decline in the life segment's net underwriting profit of EUR5m (2014: EUR43m) due to the introduction of deferred funds for future appropriation in PNW's consolidated accounts. In non-life, the group's net combined ratio improved to 95.6% in 2015 from 98.3% in 2014 when PNW was hit by large claims from natural catastrophes which exceeded the long-term average.
For 2016, Fitch expects a stable or slightly increasing investment return, driven by further realisations from fixed-income investments' unrealised capital gains for financing the additional life reserve (Zinszusatzreserve). In 2015, PNW's investment return rate increased to 4.6% (2014: 4.1%).
PNWL's gross written premiums (GWP) increased to EUR2.3bn in 2015 from EUR2.1bn in 2014 as the company's single premium business grew 15%. PNWL's new business measured by annual premium equivalent (APE, annual premium + 1/10 single premium) grew by 10%, compared with the industry's decline of 5% in 2015. Unit-linked and disability business and products with alternative guarantee models contributed 46% to PNWL's APE (2014: 38%).
PNW had total assets of EUR24.9bn at end-2015 and it reported GWP of EUR4.1bn. 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, any change in SFG's IDR is 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. We consider such a change as unlikely in the near to medium term but it could result, for example, from a severely depleted capital position at PNWL and WPV.
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