Rating agency Standard & Poor’s has revised D.A.S. Legal Expenses Insurance Co.’s outlook from negative to stable. At the same time, the ‘A’ long term counterparty credit and insurer financial strength has been affirmed.
S&P expects DAS UK to report a net profit for 2011 in excess of £4 million. This is supported by improved underwriting performances and continued steady investment income from its highly conservative investment portfolio. Also, the revised outlook to stable from negative reflects S&P’s view that DAS UK will remain strategically important to its mother company Munich Re.
Standard & Poor’s report :
The ratings on DAS UK reflect its strategically important status to Munich Reinsurance group (Munich Re; main entities are rated AA-/Stable/–). Under Standard & Poor’s group rating methodology criteria, we factor three notches of parental support into our ratings on DAS UK for being a strategically important subsidiary. The ratings also reflect DAS UK’s good competitive position in the niche U.K. legal expenses insurance (LEI) market. These strengths are partially offset by the moderate level of capital held at the company, and the moderate but improving earnings track record.
DAS UK is wholly owned by D.A.S. Rechtsschutz-Versicherungs-AG (DASG; A+/Stable/–), the European leader in legal expenses insurance. DAS UK’s strong working relationship with DASG provides expertise in key areas of the LEI business. In addition, the company has received capital injections from the parent, most recently in the first quarter of 2010, and has increased the significant reinsurance protection it receives from the group. In return, DAS UK provides DASG with a leading position in the U.K. LEI market, and DAS UK management has been selected to spearhead the group’s international expansion into Anglophone countries, such as Canada.
DAS UK is a leader in the LEI market with an estimated market share of approximately 20% in before-the-event (BTE) products. The robustness of the company’s competitive position in its key lines is highlighted by the success with which it has pushed through significant rate increases while maintaining high client retention, as well as sourcing a number of new programs. As a monoline and predominantly U.K.-dependent insurer, DAS UK lacks diversification and remains susceptible to changing regulation. The strength of DAS UK’s distribution and relationship with clients gives it a defendable position.
Capitalization remains a relative weakness for DAS UK in our view. Capital adequacy deteriorated for 2009 as a result of the operating loss. At the beginning of 2010, DASG injected extra capital of £3 million into DAS UK. An improvement in DAS UK’s capitalization is likely over the next two years in our view; however, due to its capital strategy, any unexpected losses could result in capital adequacy pressures.
DAS UK has reported an underwriting loss every year from 2003 onward, but a net profit for each year except 2009 and 2010. Dividends have not been paid since 2008. The difficulties faced by the company and its competitors in 2009 reflected an increase in claims frequency due to the deterioration in the economic environment, especially unemployment. We understand that the implementation of significant price increases and actions to reduce claims costs are having a positive effect, and the underwriting result is already much improved (in the first half of 2011, the underwriting loss decreased by £4.5 million).
The stable outlook reflects our view that DAS UK will remain strategically important to its ultimate parent, Munich Reinsurance Co. (AA-/Stable/–). Any change in this view could lead us to change the ratings on DAS UK. In addition, we expect the company to report a net profit for 2011 in excess of £4 million (which should increase in 2012), driven by an improved, break-even underwriting performance and continued steady investment income from its highly conservative investment portfolio. This, in turn, should result in a steady increase in its capital adequacy over the next two years. However, without a significant improvement in its pension fund deficit (held on the balance sheet of a related service company), the ratio is likely to remain a relative rating weakness.
We do not expect to raise the rating over the rating horizon. However, a downgrade could occur if DAS UK’s underwriting performance does not recover sufficiently, or if investment strategies become significantly less risk-averse, both of which would likely impede improvement in its capital adequacy.
Source : S&P
