Fitch Affirms LV 1871's IFS at 'A+'; Outlook Negative
The Negative Outlook reflects uncertainty over whether LV 1871 can maintain its current capitalisation given increased asset/liability management (ALM) risk due to continuing low interest rates, and whether LV 1871 can continue to achieve reinvestment rates higher than liability guarantees.
KEY RATING DRIVERS
The rating reflects LV 1871's strong business 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 our own internal risk-based measures. These factors are offset by the small size of the company, which limits diversification, and also by increased ALM risk due to low reinvestment rates and ZZR costs, which is driving the Negative Outlook.
LV 1871 is 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 to meet guaranteed interest rate payments for the traditional savings business, which Fitch views positively.
LV 1871 scored 'extremely strong' (2014: 'very strong') in Fitch's Prism factor-based model (Prism FBM), based on end-2015 financials. Fitch expects LV 1871 to maintain this score at end-2016. The group regulatory Solvency I margin was 212% at end-2015 (2014: 176%). We expect LV 1871 to report a strong Solvency II ratio of more than 200% without transitional measures at end-2016 and a stable trend for 2017 if yields remain at current levels.
For 1H16 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 decline further.
Fitch believes that LV 1871's ability to build additional capital is constrained by ZZR costs and by profitability suffering from the low investment rates. However, in 2015 LV 1871's growth in funds for future appropriation was stronger than balance sheet growth, and the insurer's capitalisation improved.
In 2015, LV 1871's reinvestment rate was higher than the rate needed to service the liability guarantees. LV 1871 reported a stable net investment return of 4.5% in 2015, which was in line with the German life sector average (2015: 4.5%). We expect LV 1871's investment return to be stable in 2016.
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-2015 the consolidated group had total assets of EUR6.9bn (2014: EUR6.5bn) and reported gross written premiums of EUR837m (2014: EUR829m).
The rating could be downgraded if LV 1871's Prism FBM score weakens to 'very strong' for a sustained period, if Fitch expects reinvestment rates for fixed income investments to be below liability guarantees on a sustained basis or if the group's strong franchise in the disability line deteriorates.
The Outlook could be revised to Stable if LV 1871 maintains reinvestment rates higher than liability guarantees and an 'extremely strong' Prism FBM score for a sustained period.