RPT-Fitch Affirms Provinzial NordWest's Insurance Entities at IFS 'AA-'; Outlook Stable

Fri Jan 31, 2014 4:58am EST

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Jan 31 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed non-life insurer Westfaelische Provinzial Versicherung AGa€™s (WPV) and life insurer Provinzial NordWest Lebensversicherung AGa€™s (PNWL) Insurer Financial Strength (IFS) ratings at a€˜AA-a€™ with a Stable Outlook.

KEY RATING DRIVERS

The ratings reflect Fitcha€™s view of WPV and PNWL as core entities of the public sector (PS) insurance group German Provinzial NordWest (PNW) which, in turn, is an integral part of the German savings bank group Sparkassen-Finanzgruppe (Sparkassen) (SFG; A+/Stable). The ratings of WPV and PNWL benefit from their ownership by SFG.

On a standalone basis, PNW is strongly capitalised and has prudent reserving methods. Less positively, PNW's significant exposure to home insurance in its non-life operations causes the business to be exposed to windstorm damage, although this is mitigated by adequate reinsurance. Its regional focus on North-West Germany limits its geographical diversification and growth potential. PNWa€™s strong market position in its home market is supported by its large agency network and distribution of its products through SFG banks. PNWLa€™s ability to attract single premium business also benefits from the companya€™s membership of SFG. Fitch expects the groupa€™s life GWP to have increased in 2013 due to strong growth in single premium business. In addition, WPV has achieved strong underwriting results with a combined ratio of 92.9% in 2012, below the market average of 96.3%.

The storm events a€œChristiana€� and a€œXavera€� in 2013 produced a combined gross loss for PNW of about EUR125m, but were mitigated by adequate reinsurance. Fitch does not expect these major claims to have added more than 3pps to PNWa€™s consolidated 2013 net loss ratio. Overall, PNWa€™s net combined ratio is expected to have remained fairly stable in 2013.

Fitch expects net investment return rate (NIRR) at PNW to have decreased to around 4% in 2013 from 4.4% in 2012, due to the continued low investment yield environment. Fitch expects that PNW will report lower net income in 2013 (2012: EUR136.2m), but still above EUR100m, based on a consistently strong result from WPV.

Fitch believes that PNWa€™s consolidated GWP for 2013 will have seen above-market average growth, driven by its life segment. PNW had total assets of EUR22.3bn at end-2012 and reported GWP of EUR3bn in 2012. WPV and PNWL are its largest operating insurers, with total assets of EUR2bn and EUR18.1bn respectively. After some owners of PNW had expressed interest in a disposal of their shares, PNW and the PS insurance group Provinzial Rheinland (PRL) began merger negotiations at end-2012. However, negotiations were unsuccessful and concluded without result at end-2013.

RATING SENSITIVITIES

Changes to SFG's rating would be reflected in the ratings of WPV and PNWL, given the integral role of public-sector insurers within SFG.

In addition, a downgrade of PNWL and WPV's ratings could be triggered by any adverse change in Fitch's view of the strategic importance of public sector insurers within SFG or of PNWL and WPV within the PNW group. This could result, for example, from a severely depleted capital position at PNWL and WPV, although Fitch views this as unlikely.

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