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Fitch Downgrades VOLKSWOHL BUND's IFS to 'A+'; Outlook Stable
August 29, 2014 / 3:21 PM / 3 years ago

Fitch Downgrades VOLKSWOHL BUND's IFS to 'A+'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/LONDON, August 29 (Fitch) Fitch Ratings has downgraded Germany-based life insurer VOLKSWOHL BUND LEBENSVERSICHERUNG a.G.'s (VBL) Insurer Financial Strength (IFS) rating to 'A+' from 'AA-'. The Outlook is Stable. KEY RATING DRIVERS The downgrade reflects Fitch's expectation that VBL's capital position will gradually decline because of persistently low bond yields. VBL has reported strong new business in the annuity line in recent years, which has led to a much greater increase in the duration of its liabilities than for peers. As a consequence, VBL's duration gap is larger than peers' and leads to a higher reinvestment risk for the insurer. In Fitch's opinion, growth in VBL's capital resources will not keep pace with the growth of the business. VBL's business has grown fairly fast in recent years, with asset growth averaging more than 10% annually in recent years, exacerbating the effects of low yields. Although VBL has, until now, been able to maintain its capitalisation, it has increased the credit risk in its fixed-income portfolio to boost its investment yield. The Fitch-calculated "risky asset ratio" for VBL has worsened in recent years from being in the 'AAA' category to being in the 'A' category, although Fitch expects the ratio to stabilise. Furthermore, the reform of the German life insurance market (Lebensversicherungsreformgesetz, LVRG) and the introduction of Solvency II have led to additional costs for German life insurers. As a result of all these factors, Fitch believes that VBL's capitalisation is likely to decline, as the challenges will limit growth in capital resources while policyholders' liabilities and related assets will almost certainly continue to grow significantly. The rating reflects VBL's still-strong capitalisation, its business position within the independent financial advisor (IFA) and sales organisation markets, and sound expense ratios. Negative rating drivers are its exposure to the difficult operating environment for German life insurers and its limited geographical diversification; VBL operates solely in Germany. Measured as a proportion of actuarial reserves, VBL's available life funds were stable at 8.3% at end-2013. Fitch estimates that this ratio for the German life market as a whole decreased to 7.4% at end-2013 from 7.7% at end-2012. VBL's capitalisation remained strong at end-2013, on the basis of Fitch's risk-adjusted assessment, as did the regulatory group solvency ratio, which decreased only slightly to 216% (end-2012: 218%). Fitch expects that VBL's group solvency ratio will decline in 2014 but remain above 180%. Expense and mortality profits have been consistently strong. In 2013, VBL's administration expense ratio was 2% and its acquisition expense ratio was 4.8%, which were better than the market averages of 2.3% and 5.1%, respectively. Fitch expects VBL's expense ratios to remain better than the market average in 2014. VBL is the holding company of the VOLKSWOHL BUND group (VBG). It has the legal form of a mutual and is VBG's most important operating entity, with total assets of EUR10.6bn, equating to 99% of the group's total, at end-2013. The company focuses on life insurance for private customers and small- and medium-sized enterprises in Germany. VBG generated gross written premium of EUR1.4bn in 2013. RATING SENSITIVITIES An upgrade of the rating is unlikely in the near to medium term, given the difficult operating environment for German life insurers. Key rating triggers for a downgrade include a deteriorated capital position with a solvency margin below 170%, and a significant decline in the company's market position. Contact: Primary Analyst Dr Christoph Schmitt Director +49 69 768076 121 Fitch Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Secondary Analyst Dr Stephan Kalb Senior Director +49 69 768076 118 Committee Chairperson David Prowse Senior Director +44 20 3530 1250 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Insurance Rating Methodology', dated 13 November 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status 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 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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