OREANDA-NEWS. Fitch Ratings has affirmed German life insurer Stuttgarter Lebensversicherung a.G.'s (SLV) Insurer Financial Strength (IFS) rating at 'A+' with a Stable Outlook.

KEY RATING DRIVERS

The affirmation reflects SLV's strong capital position, its strong earnings and earnings diversification through its affiliates and the company's strong position in the German IFA market. The rating is limited by SLV's small size.

Based on Fitch's Prism Factor-Based Model capital assessment, SLV's capitalisation is viewed as "very strong". In addition, SLV reported a strong regulatory solvency ratio of 237% at end-2013 and Fitch expects SLV to have maintained this ratio at around 220% at end-2014. Capitalisation is also supported by the fact that the company has no financial leverage.

SLV has a strong position in the German IFA market. However, as SLV focuses on this distribution channel and only operates in Germany, it has limited geographic diversification and is highly exposed to domestic economic and regulatory changes.

Fitch views positively that SLV has been well prepared for the challenges arising from legislative changes to the German life insurance sector ("Lebensversicherungsreformgesetz"), effective from 1 January 2015. Although 2014 was a successful year for SLV in terms of new business, which Fitch expects to have increased by around 10%, we are forecasting a slight decrease in SLV's gross written premiums (GWP). This reflects SLV's decision to focus on regular premiums at the expense of its single premium business.

Fitch expects SLV's net investment return rate to have improved to about 5% in 2014 (2013: 4.8%), partly supported by realised capital gains. SLV's off-balance-sheet unrealised capital gains are also expected to have increased to over 17% of total investments at end-2014, from 11% at end-2013. SLV's off-balance-sheet unrealised capital gains are diversified by asset class, which Fitch views positively.

SLV's exposure to equity investments continues to exceed the German market average. It stood at 9.1% of total investments at end-2013 versus the market's 3.3% and Fitch expects this to have slightly decreased in 2014. Given SLV's strong capitalisation and stable investment strategy, we expect that SLV's equity exposure will continue to remain above the market average in 2015, leaving the company more susceptible to equity-market shocks than many of its peers.

SLV is the holding company and main operating entity of the Stuttgarter mutual insurance group. The consolidated group had assets of around EUR6.5bn at end-2014 and generated GWP of over EUR620m in life insurance and more than EUR100m in non-life in 2014.

In 2013 SLV reported consolidated net income of EUR10.4m, representing a strong return on equity of 10.6% despite increased expenses for reserving a potential shortfall of guaranteed interest rate payments ("Zinszusatzreserve"). Fitch expects SLV's profitability to have remained strong in 2014 despite a further increase of expenses for "Zinszusatzreserve". SLV's profitability also benefits from strong performance at its non-life subsidiary Stuttgarter Versicherung AG (SVA). SVA reported a strong combined ratio of 86.3% in 2013, which we expect to have improved in 2014.

RATING SENSITIVITIES

Given the fairly small size of the company an upgrade is unlikely in the medium term.

Key ratings triggers for a downgrade include capitalisation declining to a level of below "very strong" in Fitch's Prism Factor-Based Model capital assessment and a sustained weakening in profitability, resulting in a return on equity below 8% (on a consolidated basis) over a sustained period.