Best Rates Finland’s Tapiola ‘A’

November 10, 2006

A.M. Best Co. has assigned a financial strength rating of “A” (Excellent) and an issuer credit rating of “a” to Finland’s Tapiola General Mutual Insurance Company (also known as Keskinainen Vakuutusyhtio Tapiola) with a stable outlook.

“The ratings reflect the company’s strong consolidated risk-adjusted capitalization and its excellent business profile in the Finnish market,” said Best. It cited “Tapiola’s underwriting performance” as an offsetting factor.

“Tapiola’s risk-adjusted capitalization is excellent and has been built up through retained earnings and significant equalization reserves, which A.M. Best regards as capital,” the bulletin continued. Best said it “regards Tapiola’s overall risk profile as low due to its focus on personal lines of business. However, the long tail of claims reserves for motor third party liability and workers’ compensation exposes the company to the risk of adverse reserve developments. The company also benefits from an adequate reinsurance program placed with highly rated companies.”

Best also stressed its belief that “Tapiola has an excellent position in the Finnish non-life market. The company is the third-largest general insurer with a market share of approximately 18 percent and is part of a group of mutual companies active in general insurance, life insurance, pension and financial services.

“Tapiola writes a book of business that includes mainly motor, property and workers’ compensation insurance.” Best expects the Company “to increase gross premiums written by approximately 7 percent to €630 million (USD 800 million) in 2006. The company is improving its market position due to an effective distribution network and its strong brand despite a relatively mature and concentrated Finnish non-life market.”

However, Best expressed concerns about Tapiola’s unprofitable underwriting. The report noted that the Company’s “underwriting results continue to be negative, mainly driven by compulsory motor third party liability and workers’ compensation where compensation is mainly in the form of annuities.

“However, the long tail of these claims (approximately 10 years) enables Tapiola to compensate underwriting losses through investment income. Technical results are also influenced by the unwinding of the discount for annuities and rebates to policyholders.”

Best said it “expects a deterioration of the combined ratio by approximately 2 percent to 110 percent in 2006 due to non-recurring costs for investing in claims management and product development as premium rates remain stable.

However, Best also indicated that it “expects Tapiola to achieve an overall after-tax profit of approximately €40 million (USD 51 million) before equalization reserves, which translates into a return on premium of 6 percent. This is supported by strong investment returns, although Tapiola has been reliant upon realized capital gains over the last six years.”

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