August 18, 2017 / 10:23 AM / a year ago

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

(The following statement was released by the rating agency) FRANKFURT/LONDON, August 18 (Fitch) Fitch Ratings has revised German life insurer Lebensversicherung von 1871 a. G. Muenchen's (LV 1871) Outlook to Stable from Negative while affirming the Insurer Financial Strength (IFS) Rating at 'A+' (Strong). KEY RATING DRIVERS The revised Outlook reflects our expectation that LV 1871 will continue to achieve reinvestment rates higher than liability guarantees. It also reflects the company's stable capitalisation at end-2016 and very strong asset and operating leverage. The rating reflects LV 1871's very strong capitalisation, improved asset and liability management (ALM) risk due to better than expected reinvestment rates compared with the costs for the additional reserve ("Zinszusatzreserve", ZZR), and a moderate business profile. The company scored 'Extremely Strong' (2015: 'Extremely Strong') in our assessment of capitalisation according to Fitch's Prism factor-based model (FBM), based on end-2016 financials. We expect LV 1871 to maintain a Prism FBM score of at least 'Very Strong' at end-2017. The group reported a regulatory Solvency II ratio of 350% without transitional measures at end-2016, which was among the highest in the German life insurance market. We expect LV 1871 to maintain a Solvency II ratio of more than 300% without transitional measures at end-2017; however, the ratio could prove volatile if interest rates change. We believe that LV 1871's ability to build additional capital is constrained by ZZR costs and by profitability suffering from low investment rates. In 2016, LV 1871's growth in equity and funds for future appropriation was sufficient to maintain the company's capitalisation, as reflected in stable leverage ratios and Prism FBM score. For 1H17 LV 1871's reinvestment rate for fixed income investments exceeded the rate needed to service policyholder guarantees, which we expect to continue for the rest of the year. We expect LV 1871 to maintain a reasonable buffer between the running yield in its fixed income portfolio and the rate needed to service guarantees. However, the buffer may come under pressure if interest rates resume their decline. Based on our calculations, LV 1871's duration gap improved to 2.2 years at end-2016, which we regard as strong, from 3.1 years at end-2015. While the business profile of LV 1871 is constrained by its size, we view the company as one of the top 10 insurers in Germany's disability market. Due to a large proportion of underwritten disability business, the company is well-positioned to mitigate the impact of low yields. This is because underwriting earnings from its disability business can help meet guaranteed interest rate payments for the traditional savings business, which we view positively. RATING SENSITIVITIES The rating will likely be downgraded if LV 1871's Prism FBM score weakens to 'Strong'. Additionally, the rating could be downgraded, if Fitch expects reinvestment rates for fixed income investments to be below liability guarantees on a sustained basis or if the company's strong franchise in the disability line deteriorates. Due to the company's moderate business profile and the challenging market environment for German life insurers we regard an upgrade of the rating in the near to medium-term as unlikely. 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 Federico Faccio Senior Director +44 20 3530 1394 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available on 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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