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27 Jun 2016 | 
 

On 20 June S&P issued following report:

Aland-Based Insurance Group Alandia Outlook Revised To Positive On Likely Lower Investment Risk; Affirmed At ‘BBB+’

In our view, Alandia’s management and governance have improved to satisfactory, reflecting the group’s successful demutualization and implementation of its strategic plan to expand its underwriting activities and lead the market in selected business lines.

We still assess Alandia’s risk position as moderate, although investment risk has decreased over the past 12 months and the company plans to reduce it further. We are therefore revising our outlook on Alandia to positive from stable and affirming our ‘BBB+’ ratings.

The positive outlook indicates that we could raise the ratings if Alandia delivers on its plan to derisk its investment portfolio, mainly by lowering the proportion of high-risk assets, over the next 12-24 months.

STOCKHOLM (S&P Global Ratings) June 20, 2016–S&P Global Ratings said today that it had revised its outlook on Åland-based insurance group Försäkringsaktiebolaget Alandia to positive from stable. At the same time, we affirmed our ‘BBB+’ long-term insurer financial strength and counterparty credit ratings on Alandia.

The outlook revision stems from our view that Alandia’s risk position will improve further over the next two years. That said, although we believe Alandia’s risk position has improved over the past year, we continue to assess it as moderate. We believe Alandia’s risk position remains constrained by a large proportion of high-risk investments, with shares and equity funds constituting 40% of the investment portfolio in 2015, unrated bonds 17%, and real estate 11%. At the beginning of 2016, Alandia reduced its foreign exchange risk exposure through a hedging program. In addition, since 2013 Alandia has gradually reduced its exposure to high-risk assets and single obligors. We expect the concentration risk regarding single obligors to remain below 10% over the rating horizon.

We expect Alandia will continue reducing its investment leverage over the next 12-24 months, mainly by lowering the proportion of high-risk assets such as equity and unrated bonds, in line with the strategy it introduced in 2016 of replacing investment risk with insurance risk. If this new strategy is fully executed over the next two years, we believe Alandia’s risk position could strengthen to intermediate from moderate.

Alandia’s management and governance have improved to satisfactory, reflecting the group’s successful demutualization and implementation of its strategic plan to expand its underwriting activities and lead the market in selected business lines.

The rating affirmation reflects our view of Alandia’s expertise in the Finnish and Swedish marine insurance markets, constrained by its lack of scale and limited geographic and product diversity. That said, Alandia plans to continue leveraging its competitive position in Finland and Sweden to more rapidly expand its business volumes over the next five years in Norway, Denmark, and international markets, mainly through an increased share of brokered business or partnership distribution. We believe growth of marine hull business will be limited, taking into account the very competitive marine hull insurance market and Alandia’s continued focus on profitable growth. However, we believe Alandia is more likely to succeed in expanding its yacht insurance activities in Finland and Sweden through increased product offerings as yacht sales are picking up, in particular for smaller yachts.

In addition, Alandia’s capital adequacy remains a key strength for the ratings. It currently exceeds our expectations for the ‘AAA’ confidence level, according to our risk-based capital model. However, we limit our capital and earnings assessment to strong, based on the small size of the group’s capital base (€172 million at year-end 2015), which leaves it exposed to capital volatility in the event of potential large underwriting or investments losses. That said, we believe Alandia’s reinsurance program (the reinsurance utilization ratio was 38% in 2015) will continue to provide a substantial buffer against possible unpredictable claims. In our base-case scenario, we assume that capital adequacy will remain at least at the ‘AAA’ confidence level.

The positive outlook indicates that we could raise the ratings on Alandia during the next 12-24 months if the group continues to execute its strategy to derisk its investment portfolio, mainly by lowering the proportion of high-risk assets. If this strategy is successful, Alandia’s risk position could improve to intermediate from moderate, which would support an upgrade.

We could revise the outlook to stable if Alandia’s investment leverage remains high or if planned business growth and geographic expansion lead to underwriting losses and a weaker-than-expected competitive position.

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