RPT-Fitch affirms LV 1871's IFS at 'A+'; outlook stable

Fri Mar 14, 2014 7:49am EDT

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March 14 (Reuters) - (The following statement was released by the rating agency)

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. Fitch's view on the company's capitalisation is based both on the level of the regulatory solvency ratio and the agency's own internal risk-based measures. Fitch expects LV 1871 to maintain both its market position and strong capitalisation in 2014.

Fitch also views positively that LV 1871 has maintained its robust new business figures which led to strong growth in recent years. These factors are offset by the life insurer's relatively small size, the low investment yield environment in Germany 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 underwriting earnings from its disability business would significantly mitigate any potential challenges in meeting GIR payments, which Fitch views positively.

LV 1871 achieved a profit of EUR2.7m in its 2012 consolidated accounts after it reported a small loss of EUR0.7m in 2011. Fitch expects LV 1871's consolidated bottom-line profitability to continue to improve.

LV 1871's group regulatory solvency margin improved to 171% at end-2012 from 146% at end-2011. The significant increase in the margin was primarily driven by including unrealised capital gains on real estate investments for the first time. Fitch expects LV 1871 to maintain its level of capitalisation at end-2013 and in 2014.

In 2012, the LV 1871 group reported gross written premiums (GWP) of EUR862.2m (2011: EUR735.5m). Due to the fact that LV 1871 group's premium income benefitted from exceptionally strong single premium business in 2012, Fitch expects a notable decline in the consolidated group's GWP. However, premium income likely exceeded the agency's expectation of EUR760m-EUR790m in 2013. In 2013, LV 1871 achieved a net investment return rate of 4.4% (2012: 4.6%) which was in line with the German life sector average in 2012. Investment income was more than sufficient to meet the guarantees and the costs for the additional actuarial reserve (Zinszusatzreserve) in 2012 and 2013. In 2013, LV 1871's reinvestment rate within fixed-income investments was higher than its average guaranteed interest rate.

RATING SENSITIVITIES

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 or the group regulatory solvency margin (including unrealised gains on real estate) falling below 170% for a sustained period.

Fitch views an upgrade of the rating as unlikely in the near term due to LV 1871's relatively small size and limited diversification, and hence its vulnerability to external effects.

LV 1871 is a Munich-based mutual life insurer that directly owns 100% of the insurance companies LV 1871 Private Assurance AG, LV 1871 Pensionsfonds AG, Delta Direkt Lebensversicherung AG and TRIAS Versicherung AG. The consolidated group had total assets of EUR5.6bn at end-2012. LV 1871 distributes its products through a network of around 9,200 distribution agreements with sales organisations, IFAs, and banks.

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