A.M. Best has downgraded the financial strength rating to A- (Excellent) from A (Excellent) and the long-term issuer credit rating to “a-” from “a” of Delvag Versicherungs-AG (Delvag), based in Germany.
The outlook of these credit ratings has been revised to negative from stable.
The ratings reflect Delvag’s balance sheet strength, which is categorised as very strong as well as its strong operating performance, neutral business profile, and appropriate enterprise risk management, as well as rating drag due to its association with Deutsche Lufthansa Aktiengesellschaft (Lufthansa).
Delvag is the captive insurer for Lufthansa, a global aviation group domiciled in Germany.
A.M. Best explained that the rating downgrades reflect a weakening in Lufthansa’s credit profile, resulting from a decline in aviation traffic caused by the COVID-19 pandemic.
The negative outlook reflects the potential for further deterioration in Lufthansa’s credit profile, as well as the risk that a slow recovery in the aviation industry will lead to a deterioration in performance metrics for Delvag.
A.M. Best suggested that Delvag’s balance sheet strength is underpinned by its strongest level of risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), and by a profit and loss absorption agreement with Lufthansa that provides balance sheet protection but limits the accumulation of earnings.
The balance sheet assessment also factors in Delvag’s prudent reserving practices and good liquidity profile, according to the rating firm.
A partly offsetting rating factor is the captive’s dependence on reinsurance to protect its aviation fleet business. However, the associated credit risk is mitigated by the use of a financially strong and diverse reinsurance panel.
A.M. Best noted that Delvag has a good historical earnings track record, as demonstrated by a five-year weighted average operating ratio of 68 percent (2015 to 2019), which is supported by strong underwriting performance and good investment earnings.
However, its 2019 performance was weaker, with a combined ratio of 99 percent (2018: 78 percent), largely driven by a deterioration in loss ratio.
Additionally, a reallocation of expenses from the non-technical account to the technical account weighted negatively on Delvag’s 2019 technical results.
A.M. Best stated that it expects the loss ratio to improve in 2020, following various remedial actions taken by the company, which include discontinuation of large parts of its underperforming non-group-related reinsurance business.
The rating firm concluded: “Delvag’s profile is enhanced by its strategic importance to and integration within the Lufthansa group. It continues to leverage its expertise in the aviation and transport sectors to write a book of third-party business alongside its core Lufthansa fleet portfolio.”