OREANDA-NEWS. Fitch Ratings has affirmed Gothaer Allgemeine Versicherung AG's (GA) and Gothaer Lebensversicherung AG's (GL) Insurer Financial Strength (IFS) ratings at 'A' and Long-term Issuer Default Ratings (IDR) at 'A-'. The Outlooks on the ratings are Stable. Fitch has also affirmed GA's EUR250m subordinated debt at 'BBB'.

KEY RATING DRIVERS
The affirmation reflects Gothaer group's (GG) strong and resilient capitalisation, good market position and well diversified group structure. The rating is constrained by the adverse influences of the low interest environment on GG's investment income and long-term life liabilities.

Fitch considers GG's capital as supportive of its ratings. GG's Fitch's Prism Factor-Based Model score remains 'very strong' at end-2014 and GG reported a regulatory solvency margin of 196% (2013: 175%). The agency expects capitalisation to improve slightly in 2015.

Like other German life insurers, GG's life insurance investments have a shorter duration than the life insurance liabilities that they match. This gap contributes to interest rate risk. Fitch views this risk negatively for the rating. However, in the past two years GG has increased its asset duration, improving its position.

GG reduced its holdings of certain risky assets in 2014 and Fitch expects further improvements for 2015. In 2014, the company's investments in peripheral European countries, which exclude Greece, increased to 8.8% of total investments (2013: 7.6%), which was partly driven by increase in the market value of these investments. At end-2014, there were unrealised capital gains on these assets.

In 2014 GA's net combined ratio decreased to 96.6% (2013: 100.9%), a level slightly better than its five year average, after higher-than-average catastrophe-related claims in 2013. Investment income decreased in 2014, driven by lower current income from investments. Fitch expects that the company will maintain the level of investments income in 2015. GL's operating performance was negatively affected by high charges stemming from the need to fund additional regulatory reserve requirements (Zinszusatzreserve; ZZR). The agency expects that the higher ZZR charges along with lower investment income will put GL's operating performance under further pressure.

GG is a well-diversified group with effective sales channels, attracting customers and intermediaries across all insurance areas. Fitch considers GL and GA as core to, and fully integrated with GG, as they have the same brand, management and distribution channels, as well as similar clients and back-office operations.

GG is a mutual insurance group, which generated gross written premiums (GWP) of EUR4.5bn in 2014 (2013: EUR4.3bn), making it one of the larger German mid-sized insurance groups. GG focuses on private customers and small- and medium-sized enterprises. Products are distributed via tied agents and independent financial advisors and, to a limited degree, through co-operating banks. With GWP of EUR1.6bn, GA is GG's main non-life insurer. GG plans to merge GA with its other non-life carriers, Asstel Sach, during 2016. GG's two life carriers, GL and Asstel Leben, were merged into one entity at the beginning of 2014. The merged company reported GWP of EUR1.4bn. The health insurer, Gothaer Krankenversicherung AG, constitutes the third group segment with GWP of EUR0.8bn.

RATING SENSITIVITIES
Key rating triggers for an upgrade include an improved level of profitability in its life and investment operations while maintaining a group return on equity above 7.5% on a sustained basis. GG would also need to maintain a score of "very strong" in Fitch Prism factor-based model.

Key rating triggers for a downgrade include weakening capitalisation as measured by a decline in Fitch's Prism Factor-Based Model result to a level below "strong" or an increase in operating leverage to over 14x (2014: 13.6x), and a net combined ratio of above 105%.