OREANDA-NEWS. Fitch Ratings has revised German life insurer Stuttgarter Lebensversicherung a.G.'s (SLV) Outlook to Negative from Stable, while affirming its Insurer Financial Strength (IFS) rating at 'A+'.

The Negative Outlook reflects current pressure on SLV's profitability linked to difficult conditions in the German life market, due to low interest rates and high expenses stemming from the need to fund additional regulatory reserve requirements ("Zinszusatzreserve"). In Fitch's view, SLV is more exposed to these challenges than many other peers. SLV has a significant portfolio of traditional products with high guarantees although these have decreased to some extent in recent years as the company has shifted its focus towards unit-linked and disability products.

KEY RATING DRIVERS
The affirmation of the 'A+' rating reflects SLV's strong capitalisation and its adequate financial performance. The rating is constrained by SLV's small size and limited geographical and product diversification in its life segment.

Fitch expects SLV's capital to weaken, although capitalisation is still viewed as "very strong", based on Fitch's Prism Factor-Based Model capital assessment. SLV reported a strong regulatory solvency ratio of 221% at end-2014 (end-2013: 237%). Capitalisation is also supported by the absence of financial leverage.

In 2014, SLV reported consolidated net income of EUR0.9m (2013: EUR10.4m), representing a significantly reduced return on equity of 1% (2013: 10.6%). This was mainly due to increased expenses related to "Zinszusatzreserve". Fitch expects SLV's profitability to remain under pressure as expenses for "Zinszusatzreserve" are likely to increase in 2015-2016. This is, however, somewhat offset by the strong performance of its relatively small non-life subsidiary Stuttgarter Versicherung AG (SVA). SVA reported a strong combined ratio of 84.1% in 2014 (2013: 86.3%).

SLV's net investment return improved to 5.1% in 2014 (2013: 4.8%), partly supported by higher realised capital gains (2014: 0.7%; 2013: 0.3%). SLV's off-balance-sheet unrealised capital gains increased further to over 17% of total investments at end-2014, from 11% at end-2013. The off-balance-sheet unrealised capital gains are diversified by asset class, which Fitch views positively. SLV's equity investments represented 8.4% (excluding participations) of total investments at end-2014, above the German market average of 3.5%.

Although SLV has a strong position in the German IFA market, its concentration on this distribution channel and limited geographical diversification heighten the insurer's exposure to domestic economic and regulatory changes.

SLV is the holding company and main operating entity of the Stuttgarter mutual insurance group. The consolidated group had assets of EUR6.6bn at end-2014 and generated gross written premiums (GWP) of EUR623.8m in life insurance and EUR102.8m in non-life.

RATING SENSITIVITIES
Given difficult operating conditions in the German Life market, an upgrade is unlikely in the short-to medium-term.

Key ratings triggers for a downgrade include weakening capitalisation as measured by a decline in Fitch's Prism Factor-Based Model result to a level below "very strong" or an increase in operating leverage to over 12x and a weakening in profitability, over a sustained period.