Fitch Affirms VOLKSWOHL BUND's IFS at 'A '; Outlook Stable
KEY RATING DRIVERS
The rating reflects VBL's solid capitalisation, robust operating performance and its strong market position within the independent financial advisor and sales organisation markets. Negative rating drivers are its large asset-liability duration mismatch, its exposure to a difficult operating environment for German life insurers and its limited geographical diversification as VBL operates solely in Germany.
VBL's capitalisation remained solid at end-2014, which is reflected in Fitch's Prism Factor-based model score of 'very strong', and in the regulatory group solvency ratio, which was 207% at end-2014 (end-2013: 216%). VBL's capitalisation is supported by future funds for appropriation of EUR595m and off-balance sheet unrealised capital gains of EUR1.4bn at end-2014, a portion of which Fitch has incorporated in its assessment of the company's capital adequacy. Fitch expects that, with the introduction of Solvency II, VBL's group solvency ratio will decline significantly, but should still remain strong.
VBL privately placed EUR60m subordinated debt in 2014 and another EUR80m in January 2015. Pending discussion with the regulator all subordinated debt could be recognised as solvency capital and, following Solvency II implementation, would be grandfathered.
Expense and mortality profits have consistently been strong. Fitch expects VBL's expense ratios to have outperformed the market in 2014 and for this trend to continue into 2015. In 2014, VBL's administration expense ratio was 2% and its acquisition expense ratio was 4.7%, which were better than Fitch-estimated market average of 2.2% and 5%, respectively.
Fitch estimates that VBL has a significantly larger asset-liability duration mismatch than the German life industry. VBL reported strong growth in recent years, after the German life insurance market shifted from endowment type business to annuity type. This resulted in a strong increase of liability duration, as annuity policies' duration often exceeds 30 years. However, the company successfully introduced a new annuity product with shorter duration in January 2015.
The company has started to invest in longer-duration bonds. While this change will reduce the asset-liability duration mismatch and partially mitigate reinvestment risk, it will take time before this strategy mitigates the risks associated with the VBL's significant asset-liability duration mismatch.
However, even if low bond yields persist, Fitch expects that VBL would be able to meet guaranteed interest rate payments for more than 10 years. Because of its fast asset growth - about 10% each year in recent years - VBL's ability to build up additional capital resources is more constrained by the low yield environment than many competitors.
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 EUR11.8bn, equating to 99% of the group's total, at end-2014. The company focuses on life insurance for private customers and small- and medium-sized enterprises in Germany. VBG generated gross written premiums (GWP) of EUR1.4bn in 2014.
RATING SENSITIVITIES
An upgrade of the rating is unlikely in the near to medium term, given the difficult operating environment for German life insurers.
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.
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