OREANDA-NEWS. Fitch Ratings has affirmed Germany-based life insurer VOLKSWOHL BUND LEBENSVERSICHERUNG a. G.'s (VBL) Insurer Financial Strength (IFS) Rating at 'A'. The Outlook is Negative.

KEY RATING DRIVERS

The rating reflects VBL's strong market position within the independent financial advisor and sales organisation markets, solid capitalisation, and diversified earnings. Negative rating drivers are the insurer's large asset-liability duration mismatch and a difficult operating environment for German life insurers.

The Negative Outlook reflects our opinion that upcoming expenses for the additional mathematical reserve required by the German regulator (Zinszusatzreserve) will harm the ability of VBL to build capital in line with its growth.

VBL's capitalisation remained solid at end-2015, which is reflected in Fitch's Prism Factor-based (Prism FBM) model score of 'very strong', and in a regulatory group solvency ratio of 208% at end-2015 (end-2014: 207%). While the regulatory solvency margin was almost stable VBL's capitalisation according to our Prism FBM model was on a declining trend during 2015. Due to the introduction of Solvency II, we expect VBL's group solvency ratio to decline significantly at end-2016. Further, we expect a declining trend in VBL's capitalisation, with our Prism FBM model score potentially falling to 'strong' by end-2017.

Expense and mortality profits have consistently been strong. VBL's expense ratios outperformed the market in 2015 and we expect this trend to continue into 2016. In 2015, VBL's administration expense ratio was 1.9% and acquisition expense ratio was 4.3%, which were better than the market average of 2.3% and 4.9%, respectively.

Fitch estimates that VBL has a significantly larger asset-liability duration mismatch than the German life industry. It reported strong premium growth in recent years, after the German life insurance market shifted from endowment type business to annuity type. This resulted in a sharp increase in liability duration, as annuity policies' duration often exceeds 30 years. However, the company successfully introduced a new annuity product with shorter duration in 2015, which accounted for 27% of VBL's new business in 1Q16.

The company started to predominantly invest in longer-duration bonds more than two years ago which has significantly increased the duration of its assets. While this change has reduced the asset-liability duration mismatch and partially mitigates the reinvestment risk borne by fixed-income investments, it will take time before this strategy mitigates the risks associated with VBL's significant asset-liability duration mismatch.

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 EUR12.9bn, equating to 99% of the group's total, at end-2015. The company focuses on life insurance for private customers and small - and medium-sized enterprises in Germany. VBG generated gross written premiums (GWP) of EUR1.5bn in 2015.

RATING SENSITIVITIES

Key rating triggers for a downgrade include deterioration in VBL's capital position as evidenced, for example, by the Prism FBM score falling to 'strong', and a weakened market position as evidenced, for example, by a significant decline in GWP.

An upgrade of the rating is unlikely in the near - to medium-term, given the difficult operating environment for German life insurers.