Insurance Peer Review: German Life Insurancecdn.roxhillmedia.com/production/email/attachment... ·...

Factor Scores

Capitalization & Leverage Business Profile Asset/Liability & Liquidity Management Insurer Financial Strength Rating

AAA

AA+

AA

AA-

A+

A

A-

BBB+

BBB

BBB-

BB+

BB

1www.fitchratings.com | May 2018

Insurance Peer Review: German Life Insurance

Insurance Peer Review: German Life Insurance Issuers AL : ALTE LEIPZIGER Lebensversicherung auf GegenseitigkeitLV : Lebensversicherung von 1871 a. G. MuenchenNG : NUERNBERGER Lebensversicherung AGSL : Stuttgarter Lebensversicherung a. G.VL : VOLKSWOHL BUND LEBENSVERSICHERUNG a.G.

Bar Colours = Relative Importance

Higher Influence Moderate Influence Lower Influence

Bar Arrows = Rating Factor Outlook

Positive Negative Evolving Stable

This Peer Review report compares and contrasts Fitch’s views on the key credit factors affecting the ratings of the insurers listed to the right. Fitch assigns a score to each of the key credit factors as outlined in this report underlying the insurer’s Insurer Financial Strength (IFS) ratings. These scores are denoted by lower-case letters and follow the same scale Fitch uses for its IFS ratings (ie ‘aaa’ through ‘cc’). Also shown is each score’s relative influence (higher, moderate, lower) on the insurers’

ratings and the Outlook (Stable, Positive, Negative). Below is a summary of the factors driving the ratings for the insurers in question. The information in this Peer Review is derived from the most recently published Insurance Ratings Navigator report on each organisation, which is developed based on application of Fitch’s Insurance Rating Criteria. Links to the insurers’ individual Navigator reports, the applicable criteria report and other related research are found on the final page of this report.

IFS / OutlookA+ / Stable A+ / Stable A+ / Stable A / Stable A / Stable

AL

LV

NG

VL

SL

AL

LV

NG

VL

SL

AL

LV

NG

VL

SL

AL

LV

NG

SL

VL



Factor Levels

Capitalisation & Leverage

Alte

LeipzigerLV 1871 Nuernberger Stuttgarter

Volkswohl

Bund

AAA

AA+

AA

AA-

A+

A

A-

BBB+

BBB

BBB-

‘Strong’ to ‘Very Strong’ Capital AdequacyFitch assesses the capital adequacy of ALTE LEIPZIGER Lebensversicherung auf Gegenseitigkeit (IFS: A+/Stable), Lebensversicherung von 1871 a. G. Muenchen (IFS: A+/Stable) and NUERNBERGER Lebensversicherung AG (IFS: A+/Stable) as ‘Very Strong’, while Stuttgarter Lebensversicherung a. G. (IFS: A/Stable) and VOLKSWOHL BUND LEBENSVERSICHERUNG a.G. (IFS: A/Stable) are assessed as ‘Strong’. Capital adequacy factors highly into the ratings, as persistently low interest rates continue to pressure companies’ capital. The main measure used by Fitch to assess capital adequacy is the score obtained from Fitch’s risk-based Prism Factor-Based Model (Prism FBM). The Prism FBM score for Alte Leipziger and LV1871 is ‘Extremely Strong’, while Nuernberger and Stuttgarter score ‘Very Strong’ and Volkswohl Bund scores ‘Strong’. Volkswohl Bund’s lower Prism FBM score is mainly driven by its above-market-average business growth in recent years, which, unlike its peers, has prevented the company from building up large unrealised capital gains on invested assets.

Strong Solvency II Coverage RatiosMost German life insurance companies made use of transitional measures on technical provisions (TMTP) when reporting Solvency Capital Requirement (SCR) coverage ratios. TMTP are designed to smooth the impact of Solvency II (S2) over a period of 16 years. Fitch excludes the impact of TMTP when assessing the underlying capital position of insurers, as doing so provides a more accurate view of economic reality. If TMTPs are stripped out, the S2 SCR coverage ratios of the peer group were all well above 100%, although there is a considerable range between 136% for Stuttgarter and 350% for LV1871.

Low or No Financial Leverage Among the five companies in the peer group, Alte Leipziger, Nuernberger and Stuttgarter have no financial leverage; only LV 1871 and Volkswohl Bund have outstanding financial debt. However, Fitch does not view this as a drag on these companies’ ratings, as the financial leverage ratio for both of the companies was low, at 12%.

Higher Influence: Capitalisation & Leverage

0

50

100

150

200

250

300

350

400

Alte Leipziger LV von 1871 Nuernberger Stuttgarter Volkswohl Bund

(%)

Source: Companies Financials

Solvency II SCR Coveragewithout Transitionals- end-2016

5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0

Volkswohl Bund

Stuttgarter

Nuernberger

LV von 1871

Alte Leipziger

(x)

Operating Leverage*2016

* Operating Leverage = Liabilities (exluding unit linked)/ Shareholders' Equity and Fund for Future AppropriationsSource: Fitch



0

20

40

60

80

100


(%)

GWP by business Line2016

Unit Linked Annuity Disability Term Endowment Other

Source: Fitch

25.2

5.9

20.6

6.312.3

1.0

1.3

8.5

0.7

1.9

0

5

10

15

20

25

30


(EURbn)

Total Assets2016

General Account Unit-Linked Assets

Source: Companies' Financials

Factor Levels

Business Profile

Alte


Volkswohl

Bund

AAA

AA+

AA

AA-

A+

A

A-

BBB+

BBB

BBB-

Higher to Moderate Influence: Business Profile

Strong Business Profiles Fitch considers the business profiles of Alte Leipziger, Nuernberger and Volkswohl Bund as strong. These companies are medium-sized and have diversified earnings streams in their life operations, as well as in some non-life activities. The business profiles of LV1871 and Stuttgarter are considered as moderate, mainly because of their smaller size. The peer group consists of insurance groups that only write life insurance business or insurance groups where life insurance business dominates. The geographic focus of the peer group is on the German market. However, the peers differ with regard to the distribution channels they employ. Nuernberger has a sizeable tied agents salesforce, while the other companies mainly rely on independent financial advisors (IFAs) and sales organisations.

Well Diversified within Life Insurance All five insurance groups are well diversified by business line within their life portfolios. They all offer the main life insurance products: annuity and pensions, long-term care, endowment, term insurance and unit-linked products. Alte Leipziger and Volkswohl Bund have the highest shares

of annuity business; about half of their business is generated through these products when measured by gross written premiums. The main differentiating factor, however, is the share of products covering biometric risk (disability insurance) and unit-linked products, both of which reduce the dependency on investment income. All five companies are focused on growing disability sales and target a larger proportion of total business derived from this business line. However, Stuttgarter is less concentrated in disability insurance than its peers. Nuernberger is the strongest unit-linked player in the peer group, with about one-third of sales in this segment and about 30% of total assets. Conversely, Alte Leipziger has a relatively small position in the unit linked market.

Share of Products with Alternative Guarantees IncreasingIn line with the German life insurance market, the peer group has ceased to actively offer traditional life insurance products with the full guaranteed rate (maximum 0.90% since 1 January 2017). Fitch expects the role of guarantees to shrink in the German life insurance market and the share of traditional products to decline further to about 20% of new business in 2018.



Moderate Influence: Asset/Liability & Liquidity Management

Prudent Asset Allocation with Focus on Fixed-Income AssetsWe consider the asset allocation of the peer group as prudent. All five insurers are mostly invested in high credit quality fixed income assets. While in the current low interest rate environment, companies are under pressure to generate sufficient returns to cover contract guarantees and the build-up of the additional reserving requirement, Zinszusatzreserve (ZZR). However, we have not seen a material increase in the risk exposure of investment portfolios over the last few years.

Moderate Risky Asset Ratios Within the peer group, only Nuernberger and Stuttgarter have higher-than-market average equity investment ratios (equity investments/total investments), of around 9% and 7%, respectively (market average: around 4%). Given these two companies’ relatively high equity holdings, their risky asset ratios are somewhat higher than those of their three peers. For all five companies, the ratio of below-investment-grade bonds to shareholders’ equity is low and is not a constraining factor for their ratings.

Moderate Influence: Investment & Asset Risk

Factor Levels

Asset/Liability & Liquidity Management

Alte


Volkswohl

Bund

AAA

AA+

AA

AA-

A+

A

A-

BBB+

BBB

BBB-

Factor Levels

Investment & Asset Risk

Alte


Volkswohl

Bund

aaa

aa+

aa

aa-

a+

a

a-

bbb+

bbb

bbb-

Large Asset-Liability Duration GapMost German life companies have fixed income asset durations that are materially shorter than the duration of their liabilities. Fitch estimates that for German life insurers the average duration of liabilities is 16 years, compared with 10 years for fixed income assets. This six-year average duration gap is one of the largest in Europe. The duration gap is ratings negative for the German life industry, as it increases exposure to low interest rates through reinvestment risk. Within the peer group, LV1871 has the lowest asset-liability duration gap, while Alte Leipziger, Nuernberger and Stuttgarter have duration gaps in line with the market average. Volkswohl Bund’s duration gap is above the market average, as the company has underwritten significant new annuity business in recent years,

which has led to a notably larger increase in the duration of its liabilities than for peers.

Liquidity Risks LowAll five German life insurers maintain strong liquidity positions to allow them to satisfy any cash calls from an increase in surrender rates and to settle claims in a timely manner. All companies had more than 80% of reserves invested in liquid assets at end-2016.



Moderate Influence: Financial Performance & Earnings

No or Low Debt in Capital StructureGiven that all five companies have little or no debt, debt service capabilities are considered to have a low influence on their ratings. The two companies who have debt outstanding, LV1871 and Volkswohl Bund, have very high fixed-charge coverage ratios, which supports their relatively high scores for this credit factor.

Limited Financial FlexibilityFour out of the five insurers in the peer group are mutual companies, which results in limited access to equity markets. Alte Leipziger and Stuttgarter have never issued debt, so their ability to access the debt capital markets is currently untested. In addition, Nuernberger has not issued debt for several years, and LV1871 and Volkswohl Bund have only small amounts of debt outstanding. As a result, these companies are not high-profile names in the debt capital markets, which supports Fitch’s view of limited financial flexibility.

Low Influence: Debt Service Capabilities & Financial Flexibility

Factor Levels

Financial Performance & Earnings

Alte


Volkswohl

Bund

AAA

AA+

AA

AA-

A+

A

A-

BBB+

BBB

BBB-

Factor Levels

Debt Service Capabilities & Financial Flexibility

Alte


Volkswohl

Bund

aaa

aa+

aa

aa-

a+

a

a-

bbb+

bbb

bbb-

Reported Profits UnderstatedNet profit and return on shareholders’ equity of German life companies are typically understated, given that the profits are shared with the policyholders. In addition, the four mutual companies in the peer group (Alte Leipziger, LV 1871, Stuttgarter, Volkswohl Bund) have little incentive to report high profits due to their ownership structure. For these mutual insurers, profit sharing with policyholders often exceeds minimum regulatory or contractual requirements to minimise tax payments. Actuarial gross earnings (pre-contribution to funds for future appropriation and ZZR) compared to surplus indicates that the profitability for all five companies is strong.

ZZR Impacts Investment ReturnOver the last seven years, the German life insurance sector was required to accumulate ZZR of EUR60 billion, equivalent to almost 7% of the sector’s mathematical reserves. As the annual contribution to ZZR in 2016 amounted to 1.7% of investments, companies were not able to finance the ZZR requirements with current investment income but needed to realise capital gains. As a result, the average return on investment (including realised gains) generated by the peer group was 4.5% in 2016.



Alte Leipziger Lebensversicherung a. G.

Financials 2012 2013 2014 2015 2016

Gross Written Premium (EURm) 2,225 2,327 2,636 2,780 2,827

Total Assets (EURm) 20,469 21,572 23,015 24,627 26,177

Total Shareholders' Equity (EURm) 540 605 721 787 846

Net Income (EURm) 56 65 116 66 59

Capitalization & LeverageRegulatory Group Solvency Ratioa (%) 198 217 237 225 295

Financial Leverage Ratio (%) 0 0 0 0 0

Life Operating Leverage (X) 12.6 11.4 10.9 10.8 11.2

Financial Performance & Earnings Return on Equity (%) 11.0 11.4 17.5 8.7 7.3

Pre-tax Return on Assets (%) 0.5 0.5 0.4 0.3 0.3

Total Assets Growth (%) 5.7 5.8 7.7 7.4 6.6

Net Combined Ratio (%) 98.9 99.9 100.0 102.9 101.9

Investments & LiquidityNet Investment Income (EURm) 1,011 1,029 1,003 1,132 1,151

Investment Return (%) 5.4 5.4 4.8 5.1 4.8

Risky Asset to Surplus (%) 123.4 95.1 62.2 49.4 59.1

Equity Investments to Surplus (%) 115.4 91.3 51.7 38.3 48.7

Below-investment-grade bonds to Surplus (%) 7.8 3.6 10.3 10.9 3.4

Asset/Liability & Liquidity ManagementCash and Cash Equivalents to Technical Reserves (%) 1.5 1.3 1.9 1.2 1.6

Liquidity Ratio (%) 96.8 99.4 99.5 99.9 100.9

Reserve AdequacyPrior-year reserve adjustment to Prior-year Reserves (%) 10.3 8.8 7.0 6.8 7.5

Net technical reserves to net earned premiums (%) 143.2 143.8 143.1 148.2 152.0a) 2012-2015 Solvency I



Lebensversicherung von 1871 a. G. Muenchen

Financials 2012 2013 2014 2015 2016

Gross Written Premium (EURm) 862 801 829 837 783



Net Income (EURm) 3 4 4 7 6


Financial Leverage Ratio (%) 0.0 0.0 6.0 11.2 10.9





Net Combined Ratio (%) 121 107 127 126 121

Investments & LiquidityNet Investment Income (EURm) 209 212 216 238 269






Liquidity Ratio (%) 84.3 81.7 81.6 81.5 81.1

Reserve AdequacyPrior-year reserve adjustment to Prior-year Reserves (%) n.a. n.a. n.a. n.a. n.a.

Net technical reserves to net earned premiums (%) 79.2 71.1 75.6 83.7 81.7a) 2012-2015 Solvency I



Nuernberger Lebensversicherung AG

Financials 2012b 2013b 2014b 2015 2016




Net Income (EURm) 73 110 74 49 59






Total Assets Growth (%) 10.1 7.0 8.4




Risky Asset to Surplus (%) 108 125 128 141.0 140.0

Equity Investments to Surplus (%) 61.1 77.6 88.2



Liquidity Ratio (%) 94.0 99.0 105.0 91.0 90.0


Net technical reserves to net earned premiums (%) 114 126 125 126 129a) 2012-2015 Solvency I b) IFRS accounting



Stuttgarter Lebensversicherung a. G.

Financials 2012 2013 2014 2015 2016

Gross Written Premium (EURm) 677 736 727 748 763







Financial Performance & Earnings Return on Equity (%) 3.8 10.5 0.8 -0.1 17.6










Liquidity Ratio (%) 91.0 88.0 88.0 88.0 91.0


Net technical reserves to net earned premiums (%) 67 66 64 65 62a) 2012-2015 Solvency I



VOLKSWOHL BUND LEBENSVERSICHERUNG a. G.

Financials 2012 2013 2014 2015 2016


















Liquidity Ratio (%) 91.8 89.4 87.7 86.4 85.9


Net technical reserves to net earned premiums (%) 81.8 79 82.7 76.7 73.2a) 2012-2015 Solvency I



Analysts

Dr Stephan Kalb+49 69 768076 [email protected]

Mahsa Delgoshaei+49 69 768076 [email protected]

ALTE LEIPZIGER Lebensversicherung auf Gegenseitigkeit Lebensversicherung von 1871 a. G. MuenchenNUERNBERGER Beteiligungs-AktiengesellschaftStuttgarter Lebensversicherung a. G.VOLKSWOHL BUND LEBENSVERSICHERUNG a.G.

Navigators

German Life Insurance Dashboad - 2018 Outlook Fitch 2018 Outlook: German Life Insurance Big Differences in German Life Solvency II Ratios

Related Research

Insurance Rating Criteria (November 2017)

Related Criteria

Dr Christoph Schmitt+49 69 768076 [email protected]

mailto:stephan.kalb%40fitchratings.com?subject=

mailto:mahsa.delgoshaei%40fitchratings.com?subject=

https://www.fitchratings.com/site/re/899773










mailto:christoph.schmitt%40fitchratings.com?subject=



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