July 20, 2017 / 1:19 PM / a year ago

Fitch Revises VOLKSWOHL BUND's Outlook to Stable, Affirms at IFS 'A'

(The following statement was released by the rating agency) FRANKFURT/LONDON, July 20 (Fitch) Fitch Ratings has revised Germany-based life insurer VOLKSWOHL BUND LEBENSVERSICHERUNG a.G.'s (VBL) Outlook to Stable from Negative, while affirming the Insurer Financial Strength (IFS) Rating at 'A' (Strong). KEY RATING DRIVERS The revised Outlook reflects our updated assessment that VBL's asset/liability management carries less risk than previously believed. This change means that capital has to support less interest rate risk and potential demands on capital are therefore smaller. In addition, following a material change to less capital-intensive products in the company's mix of new business, Fitch expects that capital may need to support less product risk. Consequently we regard VBL's capitalisation as appropriate for the current rating level, despite a fall in Fitch's Prism Factor Capital Based Model Score (Prism FBM) to 'Strong' from 'Very Strong'. This view is supported by VBL's group Solvency II ratio without transitional measures of 179% at end-2016. The rating reflects VBL's strong capitalisation, business profile and financial performance. Negative rating drivers are the insurer's continuing, albeit reduced, asset-liability duration mismatch and a difficult operating environment for German life insurers. VBL's capitalisation is strong. Fitch's Prism FBM model result for the company was at the high end of 'Strong' at end-2016. Asset and operating leverage were very strong. We expect the Prism FBM Score to remain 'Strong' at end-2017, but for growth in total asset to extend the declining trend of capitalisation. However, we expect a 'Strong' Prism FBM Score to be maintained for at least the next couple of years. Fitch has revised its view of VBL's asset/liability management as a result of management actions to narrow the gap between the duration of assets and liabilities and new information received from the company. Investment in longer duration bonds has significantly increased the asset duration and contributed to a much smaller duration gap between assets and liabilities. VBL is a medium-sized player in the German life insurance market with a strong business profile. It has a strong franchise in its primary distribution channels of independent financial advisors and sales organisations as evidenced by an increase in gross written premiums of 2.4% in 2016, while the market declined by 1.5%. The insurer has shifted away from providing mainly traditional German life products with guarantees, and introduced an alternative, less capital-intensive, guarantee product in 2015, which accounted for 31% of the company's new business in 2016. Meanwhile, the share of new business accounted for by traditional products fell to 20% in 2016 from 43% in 2014. VBL's financial performance is strong. Fitch expects VBL to maintain its strong underwriting profitability, where the high premium share of the disability line is significant. Fitch thus expects VBL to report stable gross income before appropriations in 2017 if the company continues to realise investment gains to offset the costs for its additional mathematical reserve (Zinszusatzreserve or ZZR) required by the German regulator. RATING SENSITIVITIES Key rating triggers for a downgrade include deterioration in VBL's capital position as evidenced, for example, by the Prism FBM score falling to the low end of the 'Strong' category, and a weakened business profile as evidenced, for example, by a significant decline in gross written premiums. An upgrade of the rating is unlikely in the near- to medium-term, given the difficult operating environment for German life insurers and the declining trend in VBL's capitalisation. Contact: Primary Analyst Dr Christoph Schmitt Director +49 69 768076 121 Fitch Deutschland GmbH Neue 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: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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