Ratings Roundup: Delvag, Ocaso

A.M. Best Europe – Rating Services Limited has upgraded the financial strength rating to ‘A'(Excellent) from ‘A-‘ (Excellent) and the issuer credit ratings to “a” from “a-” of Germany’s Delvag Luftfahrtversicherungs-AG and its subsidiary, Delvag Rueckversicherungs-AG, both with stable outlooks. The rating upgrades “reflect Delvag’s increasingly strong risk-adjusted capitalization and consistently excellent operating performance, with the company reporting a combined ratio of 54.1 percent in 2011 (2010: 72 percent),” Best explained. The ratings also take into account Delvag’s role as the insurance captive of Lufthansa German Airlines, its ultimate parent. The ratings of Delvag Rueck reflect its importance to the Delvag group and the profit and loss absorption agreement provided by Delvag. Best indicated that “Delvag’s risk-adjusted capitalization is expected to remain very strong going forward. A profit and loss agreement in place with Lufthansa limits the potential for earnings retention whilst providing protection for Delvag and Delvag Rueck’s balance sheet. Delvag also benefits from substantial reserve redundancies, which further enhances its capital position. While the insurer is dependent on reinsurance to protect its fleet business, the associated credit risk is limited through the use of highly rated reinsurers. The improving trend in Delvag Rueck’s risk-adjusted capitalization due to increases in its equalization reserve and silent claims reserves is expected to continue.” Best added that it “expects Delvag to report an excellent pre-tax profit in 2012, albeit somewhat lower than that reported in 2011. Following some positive reserve development, Delvag’s pre-tax profit was up 25 percent to €21.5 million [$27.22 million], translating into a return on equity of 26 percent. Delvag’s disciplined underwriting and comprehensive reinsurance program are expected to result in stable and low combined ratios (below 80 percent) going forward. Earnings are expected to continue to be supported by strong investment returns stemming from the up streaming of profits from subsidiaries. Delvag Rueck’s operating performance is likely to improve going forward,” and Best said it “expects the company to report a good underwriting profit for 2011 as a result of lower catastrophe claims. Delvag continues to leverage its aviation and transport experience to write a diversified book of business alongside its core Lufthansa fleet portfolio. Delvag’s gross premiums written are expected to decrease slightly in 2012, driven by a small decrease in its aviation book. Delvag Rueck’s business includes a life and health portfolio written for the Lufthansa group, which mainly comprises employee benefits covers. The reinsurer also writes a book of non-life reinsurance business in the open market (predominantly aviation, property and motor business). Delvag Rueck’s premium income is likely to remain relatively stable going forward. Positive rating actions are unlikely at this time. Negative rating actions could occur as a result of a deterioration in the credit worthiness of Lufthansa, the ultimate parent. Additionally, a significant deterioration in the risk-adjusted capitalization and performance of Delvag or Delvag Rueck would also be detrimental to the ratings.”

A.M. Best Europe – Rating Services Limited has downgraded the financial strength rating to ‘A’ (Excellent) from ‘A+’ (Superior) and the issuer credit rating to “a+” from “aa-” of Spain’s Ocaso, S.A. Seguros Y Reaseguros, and has revised its outlook on both ratings to negative from stable. Best said the rating actions “reflect the continued negative developments regarding the euro zone sovereign debt crisis and the higher country risk faced by Ocaso, due to the deterioration in the sovereign creditworthiness of Spain.” Best also observed that “Ocaso maintains significant exposure to the Spanish economy, particularly within its investment portfolio. Spanish bonds (both corporate and sovereign) account for approximately 40 percent of the company’s €1.985 billion [$2.513 billion] invested assets, in addition to bank deposits and corporate equities holdings in the country. Additionally, Spain remains the main profit center for Ocaso, with approximately 98 percent of consolidated gross written premium and net profit derived from its core market.” As support for the rating, Best noted “Ocaso’s superior risk-adjusted capitalization, excellent operating performance and good local business profile. Ocaso’s risk-based capitalization remains superior, having benefited from high profitability and significant profit retention over a number of years. Ocaso’s capitalization is further supported by the coverage of catastrophic events in Spain (reinsured with the governmental company Consorcio de Compensacion de Seguros) and a good reinsurance program with good credit quality for business that exceeds Ocaso’s retention limit.” In addition Best pointed out that “Ocaso’s overall profitability is strong. Total net profits amounted to €149 million ($188.6 million) in 2011, an increase of 30 percent compared to 2010. This is a result of strong underwriting performance mainly on the non-life business. The non-life combined ratio remained low—below 80 percent in 2011—driven by the limited underwriting risk and low volatility of the company’s funeral expenses portfolio.” Best also described Ocaso as “one of the leading Spanish providers of funeral expenses, which is the company’s main line of business. Ocaso has consolidated its strong market position in that segment through the acquisition of funeral expenses portfolios from competitors exiting the market and also a strong distribution channel that includes a large number of sales agents throughout Spain. Going forward, negative rating actions are likely to stem from further deterioration in the euro zone debt crisis, in particular, the sovereign and corporate creditworthiness of the Spanish bonds.” Best said it “considers upward movements unlikely in the short to medium term.”