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Fitch Revises LV 1871's Outlook to Negative; Affirms IFS at 'A+'
December 17, 2015 / 4:07 PM / 2 years ago

Fitch Revises LV 1871's Outlook to Negative; Affirms IFS at 'A+'

(The following statement was released by the rating agency) FRANKFURT/LONDON, December 17 (Fitch) Fitch Ratings has revised German life insurer Lebensversicherung von 1871 a. G. Muenchen's (LV 1871) Outlook to Negative from Stable. At the same time LV 1871's Insurer Financial Strength (IFS) rating has been affirmed at 'A+'. The Outlook has been revised to Negative to reflect increased asset/liability management (ALM) risk as the insurer's reinvestment rates fell below guarantees for the first time in 2015. Fitch expects this trend to continue in 2016. Combined with the costs for additional actuarial reserves (Zinszusatzreserve, ZZR), the low rates will most likely lead to a decline in profitability and to decreasing capitalisation in the medium term. KEY RATING DRIVERS The rating reflects LV 1871's strong market position in German disability insurance and solid capitalisation. Fitch's view on the company's capitalisation is based on both the level of the regulatory solvency ratio and the agency's own internal risk-based measures. These factors are offset by the small size of the company, which limits diversification, increased ALM risk due to low reinvestment rates and ZZR costs, and the current difficult environment for German life insurers. LV 1871 has a top 10 position in Germany's disability market. Due to a large proportion of disability business underwritten by LV 1871, the company is well-positioned to mitigate the impact of low yields. This is because LV 1871's underwriting earnings from its disability business help the company to meet guaranteed interest rate payments for traditional German business, which Fitch views positively. LV 1871 scored 'very strong' in Fitch's Prism factor-based model (Prism FBM), based on end-2014 financials. Fitch expects LV 1871 to maintain this score at end-2015. LV 1871's group regulatory solvency margin was 176% at end-2014 and we expect it to be stable at end-2015, which also supports our view on capitalisation. However we expect a declining trend for 2016. For 2015 LV 1871's reinvestment rate for fixed income investments will have fallen below the rate needed to service policyholder guarantees. We expect this trend to continue in 2016, further reducing the buffer between LV 1871's running yield in its fixed income portfolio and the rate needed to service guarantees. Combined with ZZR costs, Fitch believes that LV 1871's ability to build additional excess capital will be limited as profitability suffers from the decreasing gap between investment return and guarantees. It is increasingly likely that funds for future appropriation cannot keep pace with balance sheet growth, resulting in a declining capitalisation. In 2014, LV 1871's reinvestment rate was higher than the rate needed to service the guarantees. LV 1871 reported a stable net investment return of 4.4% in 2014, although this was below the German life sector average (2014: 4.6%). We expect LV 1871's investment return to be stable in 2015. LV 1871 is a Munich-based mutual life insurer and directly owns 100% of its insurance subsidiaries: LV 1871 Private Assurance AG, LV 1871 Pensionsfonds AG, Delta Direkt Lebensversicherung AG and TRIAS Versicherung AG. At end-2014 the consolidated group had total assets of EUR6.5bn (2013: EUR6bn) and reported gross written premiums of EUR829m (2013: EUR801m). RATING SENSITIVITIES Key triggers for a downgrade include any Fitch expectation that reinvestment rates for fixed income investments will be below guarantees on liabilities for a sustained period, a deterioration in LV 1871's strong franchise in the disability line or a weakening of the group's Prism FBM score to 'strong' for a sustained period. An upgrade is unlikely in the near term due to LV 1871's small size, which results in limited diversification and vulnerability to external effects and the difficult operating environment for German life insurers. Contact: Primary Analyst Dr Christoph Schmitt Director +49 69 768076 121 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt Secondary Analyst Dr Stephan Kalb Senior Director +49 69 768076 118 Committee Chairperson David Prowse Senior Director +44 20 3530 1250 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available at Applicable Criteria Insurance Rating Methodology (pub. 16 Sep 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=996925 Solicitation Status here Endorsement Policy here ail=31 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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