Fitch Affirms Gothaer's IFS at 'A'; Outlook Stable
KEY RATING DRIVERS
The affirmation reflects Gothaer group's (Gothaer) strong and resilient capitalisation, good market position and well-diversified business mix. The ratings are constrained by the adverse impact of the low interest rate environment on Gothaer's investment income and long-term life liabilities.
Fitch considers Gothaer's capitalisation as strong and supportive of its rating. This view is supported by Gothaer's Fitch Prism Factor-Based Model score of 'Strong' at end-2015 and Gothaer's Solvency I margin of 194% (2014: 196%). Fitch expects Gothaer to maintain strong capitalisation and report a Solvency II ratio of well above 100% for 2016 even without the benefit of transitional measures on technical provisions.
Gothaer's net income improved to EUR137m from EUR114m in 2014. This was mainly driven by increased realised gains in the life and non-life segments. Non-life underwriting results remained stable in 2015. The combined ratio improved slightly to 96.2% in 2015 (2014: 97.7%). For 2016, we expect a slightly higher combined ratio. Investment income in the non-life segment improved in 2015 due to the one-off effect of higher realised gains on real estate investment. Life results remained affected by the negative effects of low interest rates, partly offset by increased realised gains and improved underwriting expenses. The charges stemming from the need to fund additional regulatory reserving requirements (Zinszusatzreserve) reached EUR204m in 2015 (2014: EUR151m), which was financed mainly through realisation of capital gains.
Gothaer's life insurance investments have a shorter duration than the group's life insurance liabilities. This gap is in line with the average duration gap of German life insurers. Fitch views this risk negatively for the ratings since it contributes to interest rate risk. However, in the past two years Gothaer has increased its asset duration, improving its asset/liability gap. Moreover, GL has shifted its product mix away from traditional life products with guaranteed interest rates to new products that are less sensitive to interest rates.
Fitch views Gothaer's asset allocation as prudent and well diversified. Gothaer's equity exposure remained low, despite having increased in the last two years from 0.4% in 2013 to 1.1% in 2015. Gothaer reduced further its holdings of subordinated debt in financial sector and corporates. At end-2015 these investments accounted for 3.2% (2014: 3.5%) of total investments. We do not expect major changes in Gothaer's asset allocation.
Gothaer is a mutual insurance group, which generated gross written premiums (GWP) of EUR4.5bn in 2015 (2014: EUR4.5bn), making it one of the larger German mid-sized insurance groups with a strong and stable market position. Gothaer focuses on private customers and small - and medium-sized enterprises. Products are distributed via tied agents and independent financial advisors and, to a limited degree, co-operative banks.
With GWP of EUR1.7bn, GA is Gothaer's main non-life insurer. Gothaer plans to merge GA with another of its non-life carriers, Asstel Sach, during 2017. GL, the main life insurer in the group, reported GWP of EUR1.3bn. The health insurer, Gothaer Krankenversicherung AG, constitutes the third group segment with GWP of EUR0.8bn.
Key rating triggers for an upgrade include an improvement in Gothaer's capitalisation (as measured by Fitch's Prism Factor-Based Model and other relevant metrics, such as Solvency II ratios) and improved profitability in Gothaer's life and investment operations with a group return on equity above 7.5% on a sustained basis.
Key rating triggers for a downgrade include weakening capitalisation, as measured by a decline in the Fitch Prism Factor-Based Model score to the low end of the "Strong" category, and a net combined ratio of above 105%.