• Following a review of Denmark-based Europaeiske Rejseforsikring 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 Danish non-life insurer Europaeiske Rejseforsikring A/S at ‘BBBpi’.
The ratings predominantly reflect our view of the Europaeiske’s fair business risk profile and lower adequate financial risk profile. We base our assessment of Europaeiske’s business risk profile on our opinion of its low industry and country risk and less-than-adequate competitive position. As regards its financial risk profile, we factor in our view of its lower adequate capital and earnings, intermediate risk position, and adequate financial flexibility. We combine these factors to derive a ‘bbb-‘ anchor for Europaeiske. The ratings on the company are ‘BBBpi’, as our public information ratings generally do not bear plus or minus modifiers.
Europaeiske is a wholly owned subsidiary of Germany-based travel insurer Europaeische Reiseversicherung AG, 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 company. We view Europaeiske as nonstrategic to its parent.
The company changed its brand name in 2012 to Europaeiske ERV from Europaeiske Rejseforsikring A/S. Its primary business areas are corporate and leisure travel insurance and international health insurance. Europaeiske has a 75% stake in Evropska Cestovni Pojistovna a.s., a small Czech travel insurance company, which in 2012 recorded gross premium written corresponding to Danish krone (DKK) 87 million.
Europaeiske faces low industry and country risk, in our opinion, because it writes most of its business (70%) in the stable Danish non-life market, characterized by favorable profitability. Still, we believe that low interest rates and volatile financial markets could strain earnings. While we recognize moderate product risk exposure for the Danish non-life sector, mainly emanating from natural catastrophes, we see different dynamics for Europaeiske. As a niche travel insurer Europaeiske is exposed to an increased level of product related risks outside Denmark, as experienced in recent years through weather and bankruptcy related claims.
We view Europaeiske’s competitive position as less than adequate because of the company’s lack of scale and its limited product and geographic diversity. Still, we expect it to maintain its niche market position as a leading travel insurer in Denmark. Gross premium written decreased by 9% to DKK471 million (€63 million) in 2012 from DKK519 million in 2011. This decline was mainly due to falling sales of international health insurance products and the termination of non-profitable products in its corporate business. In our base-case scenario we expect this downtrend to continue because the company has announced substantial rate increases on unprofitable business, which might lead to elevated policy cancellations.
We assess the company’s capital and earnings as lower adequate. We expect Europaeiske to maintain its capital adequacy at our benchmark for the ‘BBB’ rating category, based on Standard & Poor’s risk-adjusted capital adequacy model. However, due to the small size of its capital base, the company is susceptible to capital volatility. We believe that regulatory capital remains above intervention levels, given that the company reports its regulatory solvency requirements as covered by a multiple of 2.7x in 2012, on a par with the 2011 figure. Europaeiske reported positive net income of DKK26 million in 2012 compared with breakeven in 2011. In our base case, we assume this profitability will continue. Additionally, Europaeiske’s reorganization efforts have translated into sizable reductions of its gross technical operating expenses by DKK44 million compared with 2011 levels, which we expect the company will maintain.
In our view, Europaeiske’s risk position is intermediate. The company invested about 60% of total invested assets in bonds and 3% cash in 2012. However, we view its investments in high risk assets (19% in property, 14% in affiliated holdings, and 6% in equity) as less favorable. We have no evidence of asset derisking and therefore assume in our base case that it will remain stable.
We consider the company’s financial flexibility to be adequate, mainly given its debt free balance sheet and sound shareholder structure.
