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Danish insurer seeks more capital after 'tenuous' year-end solvency position

Unrated Danish insurer Gefion Insurance A/S is hoping to raise more money after noting in its latest annual report that it was in a "tenuous" solvency position at the end of 2018.

Unrated insurers have been in the spotlight in Europe following a spate of failures in Denmark and Gibraltar. Danish insurer Qudos Insurance A/S failed Dec. 20, 2018, a day after Gibraltar's Horizon Insurance Co. defaulted. Qudos' collapse came just months after the failure of fellow Danish insurer Alpha Insurance A/S in May 2018. The latest insurance company to go under was Gibraltar's LAMP Insurance Co. Ltd at the end of May.

Gefion replaced the failed Alpha on some U.K. policies, notably the taxi insurance policies issued by U.K. broker J&M Insurance Services (UK) Ltd., which trades as Protector Policies, among other brands. Images of taxi drivers queuing outside Protector's offices to get replacement cover were broadcast nationally in the U.K. following news of Alpha's collapse.

Gefion, which derived 59% of its business from the U.K. in 2018, said in an emailed statement to S&P Global Market Intelligence that it is now in "a reasonably good position" after restoring its Solvency II coverage ratio to 130% from the 72% it reported at year-end 2018.

The company added, however, that "with the increased focus on unrated insurers, we will be required to strengthen our capital base." It said it was difficult to say where it wanted its capital position to be, as this would depend on investor appetite, but that a Solvency II coverage ratio above 150% to 175% would, in its view, "mitigate any market and regulatory concerns around business model," including the lack of a financial strength rating.

'Restart and reinforce'

Gefion's 2018 annual report, signed off by auditors May 27, 2019, shows that the company had slipped below its solvency capital requirement, or SCR, under Europe's Solvency II capital rules as of Dec. 31, 2018, with a coverage ratio of 72%.

The SCR is one of two capital targets imposed by Solvency II, along with the lower minimum capital requirement, or MCR. The SCR is designed to be sufficient to protect an insurer against a one-in-200-year loss, while the MCR is designed to withstand a roughly one-in-seven-year loss.

The company said in its annual report that its solvency position resulted from the 48.4 million Danish kroner loss it made in 2018, driven by an underwriting loss of 39.4 million kroner and a combined ratio of 101.8%. The underwriting loss was fueled by strengthening of bodily injury reserves in the Republic of Ireland, Germany and Poland, following an independent actuarial review. The review found U.K. reserves to be adequate.

Gefion had restored its solvency ratio to 130% as of May 6, 2019, the report said, through a combination of a 39.6 million kroner cash injection from existing shareholders, buying more cover from one of its existing reinsurers and, according to the emailed statement, "a positive first-quarter result."

But the annual report goes on to say that if measures to further strengthen Gefion's capital base are not "timely," and considering its "tenuous solvency position and the risk of this position deteriorating in combination with the uncertainty relating to measurement of technical provisions as well as supervisory actions, there is a material uncertainty, that may result in the capital base becoming insufficient."

It added that this could ultimately lead to the company losing its license or being forced to wind down.

The report said Gefion will "restart and reinforce its efforts to include a sector knowledgeable investor and strengthen the capital base substantially." It added that it has hired corporate finance advisers to help the company "by way of a structured capital raising effort."

According to the annual report, the company expected in early 2018 that bringing on a third-party investor was "imminent," but uncertainty around Brexit and the "general market turmoil" surrounding unrated insurers "delayed a successful conclusion of such capital raising efforts." The capital raising efforts later had to be put on hold after Gefion's regulator, the Danish Financial Supervisory Authority, announced its intent to conduct a "scheduled ordinary inspection" of the company.

Restated results

On April 8, 2019, the FSA ordered Gefion to restate its 2017 results to exclude a deferred tax asset, which reduced the insurer's shareholders' equity by 4.95 million kroner at Dec. 31, 2017, and by 6.91 million kroner at Jan. 1, 2017. The change also meant that Gefion slipped below the SCR in 2016, with a coverage ratio of 95%, compared with the 102% it originally reported. The restated solvency ratio for 2017 was 119%, down from 123%.

The company told S&P Global Market Intelligence that it was difficult to say whether it would face further scrutiny from the FSA. It added: "We have a good and open dialogue with the DFSA but further reactions may of course come out of the ongoing ordinary inspection."

As of June 7, US$1 was equivalent to 6.59 Danish kroner.