Sale of Non-Life Insurance Operations Is Credit Positive for Aktia

Sale of Non-Life Insurance Operations Is Credit Positive for Aktia

On 27 January, Aktia plc, the parent group of Aktia Bank (A1 review for downgrade, C/A3 review for downgrade),14 announced the sale of 66% of the group’s non-life insurance business to Swedish insurance company Folksam General (unrated) and Finnish Veritas Pension Insurance (unrated). The sale is credit positive for Aktia, as it eliminates the group’s exposure to the volatility of its non-life insurance business, which it has not been able to grow to a viable scale.
In 2009, the Aktia group merged with Veritas Mutual Non Life Insurance aiming to integrate the non-life business into the group and improve cost efficiency. However, the group’s non-life insurance operations have remained relatively small, being the eighth largest player in Finland with a 1.8% market share of gross premiums written.15 Over 2009-10, gross premiums written increased by 2.5%, a slower pace than the overall 9.4% growth for the non-life market. Aktia was able to grow its market share in other lines; bank loans reached a 3.9% market share at year-end 2010, up from 2.8% at year-end 2008.16
Aktia’s non-life insurance business has reported weak performance since the merger; in 2009 the non-life business contributed negatively to overall group results. But also in 2010 and 2011, the non-life operations reported a combined ratio, which measures the sum of claims incurred and operating costs as a percentage of premiums earned, in excess of 100%, as shown in the exhibit below.

Aktia’s Combined Ratio Exceeds 100%

Aktia’s loss ratio showed some improvement to 77.8% at third-quarter 2011 from 93.5% at first-quarter 2009, but this trend may be distorted by the seasonality of non-life insurance claims. However, at 25.9% in third-quarter 2011, the expense ratio continues to exceed the average for Finland’s largest non-life insurance players.
This illustrates the relative inefficiency and insufficient growth in Aktia’s non-life business, combined with what have been relatively volatile underwriting results. Over 2009-10, the non-life business effect on Aktia group’s operating profits has ranged between -53% and +28% of operating income, and was negative in the first and fourth quarters of 2009, as well as in fourth-quarter 2010 and first-quarter 2011.

Aktia will continue to offer its clients non-life insurance products under the Aktia brand, produced by Folksam. This credit positive development will have a limited effect on the review of the bank’s A1 debt and deposit ratings and C/A3 standalone strength, which reflects standalone concerns on the bank’s credit strength.