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Rating Action:

Moody’s affirms Länsförsäkringar’s ratings

04 October 2019


Frankfurt am Main , October 4, 2019 – Moody's Investors Service ("Moody's") today affirmed the A2 insurance financial strength rating (IFSR) of Länsförsäkringar Sak Försäkrings AB ("LF Sak") and the A3 issuer rating of Länsförsäkringar AB ("LFAB"). The outlook on both companies remains stable. The ratings of Länsförsäkringar Bank AB (publ) (LF Bank) are unaffected by this announcement.

RATINGS RATIONALE

– Länsförsäkringar Sak Försäkrings AB

LF Sak is owned by LFAB, the parent company of an integrated Swedish financial group engaged in non-life, life insurance and banking activities, itself owned by 23 non-life insurance regional mutuals, which together form the Länsförsäkringar Alliance ("LF" or the "Alliance"). Moody's said that the affirmation reflects LF Saks key role within the Alliance, Sweden's leading non-life insurer.

Other credit strengths include the Alliance's high capital adequacy and very low financial leverage. These strengths are partially off-set by the Alliance's limited geographic diversification and constrained capital market access compared to some Nordic and European peers. Furthermore, the Alliance's very high equity investment exposure paired with high earnings reliance on investment returns can potentially result in earnings volatility.

LF is increasingly developing towards an integrated financial services provider with banking and other related services whose profit contributions are increasing. Going forward we expect the Alliance to maintain its competitive strengths in Sweden, where barriers to entry generally remain high.

The rating outlook is stable reflecting our expectation that the Alliance will: (1) maintain its leading position in the Swedish non-life market; (2) run its non-life book of business at relatively low risk levels; (3) hold very good levels of capital adequacy and; 4) report profitability commensurate to the overall rating level, albeit potentially volatile.

Moody's considers the capital adequacy of LF Sak as well as that of the other legal entities that combined form the Alliance as strong. At YE 2018, the 23 mutuals reported an average Solvency II coverage of 242% , Holding Company LFAB reports Group Solvency II based on financial conglomerates rules and the coverage ratio stood at 130%. We note that the Alliance has built a strong track record of strengthening its capital base and that Solvency II coverage ratios have shown to be quite robust despite recent financial market volatility.

As far as financial flexibility is concerned, the Alliance has no financial debt outstanding and therefore operates with excellent leverage and earnings coverage ratios.

In terms of credit challenges, the group lacks meaningful geographic diversification, with its business almost exclusively being written in the domestic Swedish market. While the Alliance is operating throughout Sweden, it is somewhat concentrated in the rural areas which can lead to a relatively higher level of weather-related claims, as experienced in 2018 when drought, storms and wildfires hit the Alliance's technical results. As such and mainly through property insurance propositions, we consider the Alliance to be exposed to environmental risks

With regard to profitability, the Alliance's return on capital has been strong on average over 2014-2018. Results benefitted from healthy underwriting performance, as reflected in an average combined ratio of 94%. In addition, the Alliance benefits from increased profit contribution from LF Bank and Länsförsäkringar Fondliv ("LF Fondliv"). 2018 saw a slight increase in combined ratio due to increased natural catastrophe and larger claims, followed by further increasing claims in HY-2019, resulting in a combined ratio of 100%. As far as investment results are concerned, 2014-2017 benefitted from benign equity markets, resulting in very strong investment returns, whereas 2018 investment returns were hit by deteriorating equity markets. Moody's considers the Alliance's results to be highly dependent on investment returns and thus subject to financial market and equity markets volatility in particular.

In terms of asset quality, the Alliance operates with very high equity exposure, reflected in a reported share of invested assets of c.41% at YE2018. As such, the exposure to risky assets is significant, but partially offset by the very strong capital base, namely shareholders' equity, resulting in a high-risk asset ratio of c. 98% at YE 2018, which is in line with Nordic peers.

While financial flexibility ratios are excellent, Moody's believes that the Alliance's access to capital markets is weaker than that of some larger European peers.

– Länsförsäkringar AB

A key part of the analysis of LF Sak and LFAB is the Alliance, the majority of revenue and earnings of which are derived from the regional mutuals. Although LFAB in itself is relatively small, it remains the hub of the Alliance and shares the LF brand. It also conducts the Alliance's growing Banking and Life operations which continue to diversify its earnings – in FY18, the banking and unit-linked businesses represented around 49% of the Alliance's operating profit compared to 28% in FY15. The mutuals in turn rely heavily on LFAB to achieve economies of scale, and although independent, are inherently bound together by their investment in, and reliance on LFAB, and the Alliance is held together by the inter-dependence between the mutuals and LFAB. The one-notch differential, which is one notch lower than the standard notching, is driven by (1) LFAB's core position within the Alliance, (2) its ownership by the 23 mutuals forming the Alliance, and (3) the strength and diversity of its cash flows and earnings.

WHAT COULD CHANGE THE RATING UP/DOWN

Whilst unlikely given the stable outlook, positive rating pressure could arise from a combination of (1) a strengthened business profile of the Alliance, reflecting increased diversification and lower product risk, (2) a meaningful and sustained reduction in high risk assets for the Alliance, and (3) stronger and less volatile profitability through the underwriting cycle.

Conversely, negative rating pressure could arise from (1) a material weakening of market position, (2) any increase in investment risk appetite, (3) meaningful deterioration in profitability at the Alliance, 4) a significant weakening of capital adequacy.

AFFECTED RATINGS

The following ratings were affirmed:

Länsförsäkringar Sak Forsakrings AB: insurance financial strength rating at A2

Länsförsäkringar AB: issuer rating at A3

The outlook on all the companies remains stable.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Property and Casualty Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian Badorff
VP-Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main
Germany
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Simon Ainsworth
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Releasing Office :
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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