OREANDA-NEWS. Fitch Ratings has affirmed non-life insurer Westfaelische Provinzial Versicherung AG's (WPV) and life insurer Provinzial NordWest Lebensversicherung AG's (PNWL) Insurer Financial Strength (IFS) ratings at 'AA-' with a Stable Outlook.

The ratings reflect Fitch's view of WPV and PNWL as core entities of the German Provinzial NordWest (PNW) insurance group, which we consider an integral part of the German savings bank group Sparkassen-Finanzgruppe (Sparkassen) (SFG; A+/Stable). The ratings of WPV and PNWL benefit from their ultimate ownership by SFG.

PNW is fully owned by SFG and public-sector institutions. PNW's insurance activities form a core part of SFG's product offering to its customers in a specified large geographical area. For example, two-thirds of PNWL's life business is sold by Sparkassen. In addition, PNW's brand and agency network is closely linked to SFG banks. Fitch thus considers PNW the insurance arm of SFG in its region of operations and believes that there is a high probability that SFG would provide support for it if the need ever arose.

On a standalone basis, PNW is strongly capitalised, has prudent reserving methods and has consistently reported strong underwriting performance over at least the past five years. We expect stable to slightly increasing net income for 2015. Less positively, the significant share of home insurance in PNW's non-life business exposes the group to windstorm damage, although this is mitigated by adequate reinsurance. Its regional focus on north-west Germany limits its geographical diversification and growth potential.

In 2014 PNW reported decreased net income of EUR102m (2013: EUR130m), reflecting a weaker consolidated net underwriting profit of EUR5m (2013: EUR22m). In both 2013 and 2014, PNW's home region was hit by large claims from natural catastrophes, which exceeded the long-term average. Reinsurance proved adequate in 2013 and 2014. At the same time, WPV reported a net combined ratio of 97.7% (2013: 92.2%), which was weaker than the German non-life market average of 94.1% (2013: 99.2%).

For 2015, Fitch expects a decline in investment return, driven by continued low investment yields. In 2014, PNW's investment return rate decreased to 4.1% (2013: 4.2%).

PNWL was particularly successful in attracting new life business in 2014 but Fitch does not expect this rapid growth to be repeated in 2015 or 2016. PNWL's gross written premiums (GWP) increased to EUR2.1bn from EUR1.5bn in 2013 as the company's single premium business grew 151%. PNWL's new business measured by annual premium equivalent (APE, annual premium + 1/10 single premium) grew 67.1%, compared with the industry's growth of 7.1% in 2014. The unit-linked and disability business contributed 38% to PNWL's APE (2013: 35%).

PNW had total assets of EUR23.6bn at end-2014 and it reported GWP of EUR3.9bn. The group includes one life and three non-life insurers, of which WPV and PNWL form the main pillars.

As Fitch regards PNWL and WPV as an integral part of SFG, any change in SFG's rating is likely to be reflected in the insurers' ratings.

In addition, a downgrade of PNWL's and WPV's ratings could be triggered by an adverse change in Fitch's view of the strategic importance of public sector insurers within SFG or of PNWL and WPV within PNW. We consider such a change as unlikely in the near to medium term but it could result, for example, from a severely depleted capital position at PNWL and WPV.