OREANDA-NEWS. June 17, 2015. Fitch Ratings has affirmed German insurers Nuernberger Lebensversicherung AG's (NLV), Nuernberger Allgemeine Versicherung AG's (NAV) and Nuernberger Krankenversicherung AG's (NKV) Insurer Financial Strength (IFS) ratings at 'A+'.

The agency has also affirmed their holding company Nuernberger Beteiligungs-Aktiengesellschaft's (NB) Issuer Default Rating (IDR) at 'A-'. The Outlook on all ratings is Stable. NB's EUR100m subordinated debt has been affirmed at 'BBB-'.

KEY RATING DRIVERS

Fitch views NLV (life), NAV (non-life) and NKV (health) as core to the Nuernberger group (NG), and their ratings are therefore based on a combined group assessment, under the agency's group rating methodology.

The affirmation of the group's 'A+' rating reflects NG's strong capitalisation, its leading position in the German unit-linked life and disability market. NG's strong position in the disability market allows the group to be resilient to a persistently low interest rate environment compared with many of its competitors. Offsetting these positive rating factors is the group's low geographical diversification, its above-market average exposure to equity investments and the current difficult operating environment for German life insurers.

Fitch regards NG's capitalization as strong. Based on the agency's Prism FBM capital model, NG's capital level is 'very strong'. The quality of available capital is high, as it consists mainly of shareholder funds and funds for future appropriation (FFA). 'Soft' capital such as the value of in-force business and goodwill make up only a small part of available capital.

NG's financial leverage dropped to 6% in 2014 from 12% in 2013; Fitch expects further reduction of financial leverage in 2015 following the company's exercise of its call option on its hybrid debt. Fitch expects the group to maintain its strong capitalisation at end-2015.

Fitch considers NLV as better prepared than many of its competitors for servicing its guaranteed interest rate payments in a persistently low interest rate environment. This is due to the high proportion of unit-linked and disability business in its books, which contribute significantly to its actuarial gross earnings ('Rohueberschuss'). Moreover NLV has a high level of equity and funds for future appropriation.

In 2014, NG reported a strong net income of EUR110m (2013: EUR73m), partly driven by some one-off positive effects. The non-life result has normalised after the 2013 result was negatively affected by higher-than-average catastrophe claims, and NAV reported a net combined ratio of 97.4% (2013: 98.2%). The life underwriting result, although still strong, was negatively affected by one-off strengthening in disability reserves. We believe NG is likely to benefit from a better underwriting result in 2015 but low investment yields will put pressure on its investment income.

NG's equity exposure is higher than the average for German primary insurers. As a proportion of total investments (excluding unit-linked investments), the group's exposure to equity investments stood at 8.8%, significantly higher than the life market average of 3.7% at end-2014, meaning that the group is somewhat more exposed to market volatility than peers.

NG had total assets of EUR29.2bn at end-2014 (end-2013: EUR26.9bn). Gross written premiums at end-2014 were EUR2.6bn for the life segment, EUR0.7bn for the non-life segment and EUR0.2bn for the health segment.

RATING SENSITIVITIES

An upgrade of the ratings is unlikely in the short to medium term unless the group increases its size/scale and improves diversification, while maintaining "very strong" capitalisation based on Prism Factor-Based Model.

Weak overall profitability over a period of time, as indicated for example by a return on equity below 6%, and/or sustained material erosion in capital, for example, to a level of below "strong" in Fitch's Prism Factor-Based Model capital assessment could lead to a downgrade.

Fitch expects to upgrade NB's IDR by one notch to 'A' and the rating on NB's subordinated debt (the EUR100m subordinated note) by two notches to 'BBB+', if new notching criteria proposed by Fitch are made final. The proposed criteria are currently subject to a market consultation and review period (see "Fitch Publishes Exposure Draft of Updated Notching Criteria" dated 12 May 2015 at www.fitchratings.com). No other ratings are expected to be impacted by the proposed changes to Fitch's notching criteria.