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Fitch Affirms Stuttgarter's IFS at 'A'; Outlook Stable
February 28, 2017 / 10:55 AM / 10 months ago

Fitch Affirms Stuttgarter's IFS at 'A'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/LONDON, February 28 (Fitch) Fitch Ratings has affirmed Stuttgarter Mutual Insurance Group's (Stuttgarter) Insurer Financial Strength (IFS) Rating at 'A'. The Outlook is Stable. Stuttgarter's main operating entity is Stuttgarter Lebensversicherung a.G. (SLV), which is also the holding company. KEY RATING DRIVERS The 'A' rating reflects Stuttgarter's solid capitalisation and strong investment performance. The rating is constrained by Stuttgarter's small size and limited geographical and product diversification as well as the group's high exposure to interest rate risk. Stuttgarter's capitalisation is solid as measured by Fitch's Prism factor-based capital model (Prism FBM) score of 'Very Strong' at end-2015. We expect capitalisation to weaken but to remain supportive of the rating. Operating leverage increased to 12x in 2015 (2014: 10.8x), reflecting a deteriorating trend of capitalisation, but Fitch does not expect operating leverage to have exceeded 13x at end-2016. Stuttgarter does not publish its Solvency II ratio yet, but we expect it (after application of transitional measures and volatility adjustments) to be well above 100%. Stuttgarter's life insurance investments have a shorter duration than the group's life insurance liabilities. This gap is slightly higher than the average duration gap of German life insurers. Fitch views this risk as negative for the ratings since it contributes to interest rate risk. SLV's net investment return decreased to 4.7% in 2016 from 5.2% in 2015, driven by a decrease in both the running yield and realised capital gains. Stuttgarter's off-balance-sheet unrealised capital gains represented 13% of the company's total investments at end-2016 (end-2015: 13%). Positively, these unrealised capital gains are well-diversified by asset class.. There was no significant change in Stuttgarter asset allocation in 2016 and Stuttgarter maintained its high exposure to equity investments, which represented about 7% (consolidated) of its total investments, compared with an average 4.5% for the German market. Fitch believes this makes Stuttgarter more vulnerable to equity market volatility. In 2016, SLV's premium grew 2.3% to EUR601m, while the average premium in German life market fell 2%. In recent years SLV has shifted its focus in new business away from classic guarantee products to new products that are less sensitive to interest rates, which we view positively. SLV's life underwriting result improved in 2016. Additional expenses stemming from the need to fund additional regulatory reserve requirements ("Zinszusatzreserve") fell to EUR49m in 2016 (2015:EUR82m), due to a positive one-off effect from adjustment in assumptions permitted by the supervisory authority since 2016. In the non-life business the combined ratio improved to 84% in 2016 (2015: 90%), after 2015 result was negatively affected by one-off reserve strengthening in pension funds. Stuttgarter has a strong position in the German IFA market, which Fitch views positively. However, its concentration on this distribution channel and limited geographical diversification heighten the insurer's exposure to domestic economic and regulatory changes. RATING SENSITIVITIES Given difficult operating conditions in the German life market linked to low interest rates, an upgrade is unlikely in the short- to medium-term. Key ratings triggers for a downgrade include weakening capitalisation as measured by a decline in the Prism FBM score to below 'Very Strong' or an increase in operating leverage to over 13x. Contact: Primary Analyst Mahsa Delgoshaei Associate Director +49 69 768076 243 Fitch Deutschland GmbH Neuer Mainzer Strasse 46-50 D-60311 Frankfurt am Main Secondary Analyst Dr Stephan Kalb Senior Director +49 69 768076 118 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019815 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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