Fitch Ratings has affirmed German life insurer Lebensversicherung von 1871 a.G. Muenchen’s (LV 1871) Insurer Financial Strength (IFS) rating at ‘A+’ with a Stable Outlook.
KEY RATING DRIVERS
The rating reflects LV 1871’s strong market position in German disability insurance and its strong capitalisation at end-2011. Fitch’s view on the company’s capitalisation is based both on the level of the regulatory solvency ratio and the agency’s own risk-adjusted assessment. Fitch expects LV 1871 to have maintained in 2012 both the market position and the strong capitalisation.
Fitch also views positively the high credit quality of LV 1871’s fixed-interest portfolio and robust new business figures. These factors are offset by the life insurer’s relatively small size and lack of geographical and line of business diversification.
Due to the large proportion of disability business underwritten by LV 1871, the company is well positioned to mitigate the impact of the current low interest rate environment. The German life insurance sector remains dominated by guaranteed interest rate (GIR) policies. On average, the industry needs to achieve an investment return slightly above 3% to meet GIR payments. In a sustained low interest rate environment, LV 1871’s technical earnings from its disability business would significantly mitigate any potential challenges in meeting GIR payments, which Fitch views positively.
It is likely that LV 1871 group will have achieved a small profit of EUR2m-EUR3m in its 2012 consolidated accounts after it reported a small loss of EUR0.7m in 2011. Fitch expects LV 1871 to continue improving consolidated bottom-line profitability.
At end-2011, LV 1871’s regulatory solvency margin was 168%, excluding unrealised capital gains on real estate investments. Including these gains, Fitch estimates LV 1871’s solvency margin would have been well above 180% at end-2011. Fitch expects LV 1871 to maintain its level of capitalisation at end-2012 and in 2013.
In 2011, the consolidated LV 1871 group reported gross written premiums (GWP) of EUR735.5m. Fitch expects the consolidated group to have achieved GWP growth of more than 10% in 2012, well above the market average. Fitch believes that LV 1871 will have achieved premium income of more than EUR850m in 2012.
Fitch expects that LV 1871 will have achieved a net investment return rate of 4.6% in 2012 (2011: 4.0%), in line with the agency’s expectation for the German life sector average. In 2011, LV 1871’s acquisition expense ratio improved to 4.8% and its administration expense ratio was stable at 2.5%. Fitch anticipates that LV 1871 will maintain solid expense ratios in 2012.
RATING SENSITIVITIES
Fitch views an upgrade of the rating as unlikely in the near term due to LV 1871’s low geographical and line of business diversification and hence its vulnerability to external effects.
Key rating drivers for a downgrade include a decline in LV 1871’s strong franchise in the disability line as evidenced, for example, by declining new business levels over a period of time, the regulatory solvency margin falling significantly below 170% or a significant decline in unrealised capital gains.
LV 1871 is a Munich-based mutual life insurer that directly owns 100% of the insurance companies Delta Direkt Lebensversicherung AG, TRIAS Versicherung AG, LV 1871 Pensionsfonds AG and LV 1871 Private Assurance AG. The consolidated group had total assets of EUR5.1bn at end-2011. LV 1871 distributes its products through a network of around 9,200 distribution agreements with sales organisations, IFAs, and banks.
