Composite/Multi-Line Insurers / Germany Gothaer Allgemeine Versicherung AG and Gothaer Lebensversicherung AG Full Rating Report Ratings Gothaer Allgemeine Versicherung AG Long-Term Foreign-Currency IDR A- Insurer Financial Strength Rating A Gothaer Lebensversicherung AG Long-Term Foreign-Currency IDR A- Insurer Financial Strength Rating A Sovereign Risk Long-Term Foreign-Currency IDR Long-Term Local-Currency IDR Outlooks AAA AAA Long-Term Foreign-Currency IDRs Stable Insurer Financial Strength Ratings Stable Sovereign Long-Term Stable Foreign-Currency IDR Sovereign Long-Term Stable Local-Currency IDR Financial Data Gothaer Insurance Group (Consolidated IFRS) (EURm) 2015 a 2016 Total assets 34,993 35,113 Premium income 4,517 4,411 Total equity 1,889 2,061 Net income 141 164 Total debt and hybrid 681 490 Return on equity (%) 7.4 8.3 Net combined ratio (%) 96.2 95.6 Investment return (%) 4.3 5.7 a As restated by Gothaer Key Rating Drivers Strong Capitalisation: Fitch Ratings considers Gothaer Insurance Group s (Gothaer) capitalisation as strong and supportive of its ratings. This view is supported by Gothaer s Fitch Prism factor-based capital model (FBM) score of Strong at end-2016, unchanged from end- 2015, and a Solvency II margin of 140% without the benefit of transitional measures on technical provisions. Life Performance under Pressure: Fitch expects the adverse influences of the low interest environment on Gothaer s life operating performance to continue. High charges stemming from the need to fund additional regulatory reserve requirements (Zinszusatzreserve; ZZR) in life insurance, along with lower investment income, have led to weaker life operating performance for Gothaer. Robust underwriting performance of the non-life segment is partly offsetting these negative effects. Market Position Supports Rating: Gothaer s strong market position support its ratings. Gothaer generated gross written premiums (GWP) of EUR4.4 billion in 2016 and is among the top 15 German insurance groups. The group s holding company is Gothaer Versicherungsbank VVaG, and the main operating entities are Gothaer Allgemeine Versicherung AG (GA), Gothaer Lebensversicherung AG (GL) and Gothaer Krankenversicherung AG. Exposure to Interest-Rate Risk: Gothaer s life insurance investments have a shorter duration than the life insurance liabilities that they match. This gap is in line with the average duration gap of German life insurers, but contributes to interest-rate risk. Fitch considers this risk to be negative for the rating. Since 2013, Gothaer has increased its asset duration, improving its asset/liability duration gap. The group has also shifted its product mix from traditional life products with guaranteed interest rates to new products that are less sensitive to interest rates. Well Diversified: Gothaer is a well-diversified insurance group with effective sales channels, attracting customers and intermediaries across all insurance areas. Fitch considers Gothaer s diversification supportive of the ratings but the business model, with many different subsidiaries and distribution channels, is more complex than that of peers. The company has streamlined its corporate structure in recent years. Related Research 2017 Outlook: German Life Insurance (December 2016) 2017 Outlook: German Non-Life Insurance (December 2016) Analysts Dr Stephan Kalb +49 69 768 076 118 stephan.kalb@fitchratings.com Dr Christoph Schmitt +49 69 768 076 121 christoph.schmitt@fitchratings.com GA and Asstel Sachversicherung were merged in July 2017, in a similar vein to GL s merger with Asstel Lebensversicherung at end-2014. Rating Sensitivities Improved Capitalisation and Profitability: Key rating triggers for an upgrade include an improvement in Gothaer s capitalisation (as measured by Fitch s FBM and other relevant metrics, such as Solvency II ratios) and improved profitability in its life and investment operations with a group return on equity above 7.5% on a sustained basis. Weaker Capitalisation and Profitability: Key rating triggers for a downgrade include weakening capitalisation, as measured by a decline in the Fitch FBM score to the low end of the Strong category, and a net combined ratio of above 105%. www.fitchratings.com 9
Business Profile Medium-Sized Group in Germany s Primary Insurance Market Well positioned in the domestic market Focused on Germany, with small international operations Well-diversified business mix Individual and commercial cover provided Multi-channel distribution Well Positioned in the Domestic Market Gothaer is among the top 15 largest insurance groups in the German primary insurance market and had a market share of 2.1% in 2016. Through its subsidiaries, Gothaer writes business in life, health and property/casualty business. In 2016, Gothaer was 10th in property/casualty insurance and 18th in life insurance in terms of GWP. Fitch considers Gothaer a medium-sized insurance group and regards it as having a Strong business profile, owing largely to its size, diversification and product offerings (see table). Ratings Range Based on Business Profile IFS Rating category AAA AA A BBB <BBB Very strong business profile Strong business profile Moderate business profile Weak business profile Source: Fitch Focused on Germany, with Small International Operations In 2016, 94% of Gothaer s premium income was generated in Germany. The balance of premiums is written through Gothaer s two non-life subsidiaries in Poland and Romania, Gothaer Towarzystwo Ubezpieczeń S.A. (GoTU) and S.C. Gothaer Asigurări Reasigurări S.A. (GoRom). GoTU is a medium-sized non-life insurer, with GWP of about EUR141 million in 2016 (2015: EUR138 million). Its business is dominated by motor insurance. GoRom is still in a start-up phase. In 2016 GoRom had GWP of EUR21 million (2015: EUR18 million). Fitch expects Gothaer to maintain its focus on the German market. Well-Diversified Business Mix Gothaer s business mix includes all three main German insurance businesses: life, health and non-life. Fitch considers the business mix and level of diversification to be rating positive. Gothaer s non-life portfolio is well balanced. Within Gothaer s non-life operations the motor business accounts for a lower share (24%) than the German non-life market (36%). Fitch views this positively, as we consider the motor business highly competitive and sector profitability to be weak. Related Criteria Insurance Rating Methodology (April 2017) 2
In recent years, GL has reduced the proportion of traditional life insurance and increased unitlinked and disability products. It offers defined-benefit pension schemes, biometric products and unit-linked pension plans as strategic areas of business, and is pursuing stronger new business growth in these segments, which should further improve GL s GWP mix. Individual and Commercial Cover Provided Gothaer provides a comprehensive range of insurance products to its customers. Customers include individuals, the self-employed and SMEs. The personal lines segment makes up about half of non-life insurance GWP, with the rest equally split between SME clients and larger corporate clients. Multi-Channel Distribution Gothaer distributes its products via tied agents, independent financial advisors, sales organisations, banks and directly via the internet, post and telephone. Tied agents and brokers are the dominant channels. The group has moved away from using different brands for different sales channels. Gothaer previously merged its two life subsidiaries GL and Asstel Lebensversicherung due to its perception that clients prefer to have access via tied agents as well as the internet, and because of increasing regulatory requirements. Similarly, GA and Asstel Sachversicherung were merged in July 2017. Fitch views this as credit positive since it reduces the complexity of the business model. 3
Corporate Governance and Management Corporate governance is effective and Fitch expects no significant changes in practices over the next 12-18 months. Board members own no shares, as Gothaer is a mutual. Fitch views corporate governance and management as neutral to the ratings. Ownership Is Neutral to Rating Gothaer is a mutual insurance group and therefore is owned by its policyholders. As for all mutuals, Gothaer s main objective is to serve the insurance needs of its owners. Fitch views GL and GA as core to, and fully integrated with, Gothaer, as they have the same brand, management and distribution channels, and similar clients and back-office operations. GA has a profit-and-loss transfer agreement with the group s intermediate holding company, Gothaer Finanzholding AG. Organisational Chart Group Structure As of 31 December 2016 Gothaer Versicherungsbank VVaG Gothaer Finanzholding AG Gothaer Allgemeine Versicherung AG (P & C) Gothaer Lebensversicherung AG (Life) Janitos Versicherung AG (P & C, Only IFA) Gothaer Pensionskasse AG (Pension Fund) Gothaer Krankenversicherung AG (Health) Asstel Sachversicherung AG (P & C, Only Direct) GKC Gothaer Kunden Service Centre GmbH (Customer Care) GSC Gothaer Schaden Service-Centre GmbH (Claims Management) Source: Gothaer 4
Sovereign and Country-Related Constraints Fitch rates the sovereign obligations of Germany at AAA with a Stable Outlook, and the Country Ceiling is similarly AAA. Therefore, the ratings of German insurance organisations and other corporate issuers are not directly constrained by sovereign or macroeconomic risks. Industry Profile and Operating Environment Life: Insurers Challenged by Low Investment Yields and Solvency II The German life insurance industry is operating in a difficult environment, facing low investment yields and earnings pressure. Market interest rates are likely to remain at historical lows for longer and constitute the biggest challenge for the German life insurance industry, in light of significant asset-liability duration mismatches. The German life insurance industry does, however, bear investment risk as it has to earn its guaranteed interest-rate payments, which requires an investment return of 2.4% for the industry overall. As long as low investment yields persist, these payments put pressure on the life industry s profitability and have already reduced the level of capital, via a decline in funds for future appropriation in recent years. With the introduction of Solvency II, regulatory capital requirements increased significantly for German life companies and many life companies have applied for transitional measures to limit the initial impact. In 2010, the regulator introduced an additional reserve, ZZR, to ensure that insurers would be able to cover their guaranteed interest-rate payments. For end-2016, the reference rate was 2.54%, and for every contract with a higher guaranteed interest rate, the difference between the guaranteed interest rate-discounted reserve and the reference rate discounted reserve has to be held as a buffer. Life insurers Solvency II margins will benefit from the ZZR because it will close the gap between the accounted reserve and its market value. Fitch expects that the transitional measures, together with the ZZR, will help the German life industry meet its Solvency II capital requirements. However, if low yields persist, available funds are likely to fall further and insurers capitalisation could deteriorate, putting negative pressure on credit ratings. Non-Life: Motor Rates Set to Decline, Timing Uncertain The German non-life insurance industry continues to benefit from strong underwriting discipline and underwriting results are expected to remain profitable. There is greater focus on achieving underwriting profitability as low interest rates continue to constrain insurers investment income. However, Fitch expects motor premium rates to decline. The non-life industry remains well reserved and investment strategies are generally very prudent. Fitch regards the German nonlife insurance market as strong from a credit perspective. The latest cycle in motor premium rates reached a low point in 2009 and 2010; since then, motor rates have increased significantly. The motor sector has achieved underwriting profits (prior to equalisation reserve changes) since 2014. However, the likelihood of a reversal in motor premium rate trends has increased and motor rates could decline in 2017 or 2018 if underwriting discipline is not maintained. The motor line s total premium income would also decline, but with a lagged effect relative to the timing of any reduction in premium rates. The German non-life sector is well capitalised and reported an initial Solvency II SCR coverage ratio of 278%. Fitch expects the German non-life sector to maintain SCR coverage above 250% over the short to medium term. Ratings Range Based on Industry Profile/Operating Environment IFS Rating category Senior debt Rating category Non-life AAA AA AA A A BBB BBB BB <BBB <BB Life Source: Fitch 5
Peer Analysis Key Figures for the German Non-Life Insurance Sector, 2016 Company IFS Rating Outlook Alte Leipziger A+ Stable Nuernberger A+ Stable DEVK A+ Stable Gothaer A Stable German nonlife sector a n.a. Stable Total assets (EURm) 825 990 2,192 3,642 174,000 GWP (EURm) 430 595 1,294 1,723 76,500 Change in GWP (%) 4.6-3.7 4.4 1.1 3.0 Reported net income (EURm) 2 24 88 53 4,000 Claims ratio (gross, %) 65.3 66.6 73.1 65.0 67.3 Expense ratio (gross, %) 32.4 31.7 21.7 29.2 25.0 Combined ratio (gross, %) 97.7 98.3 94.8 94.2 92.4 Combined ratio (net, %) 101.8 97.1 94.6 97.5 95.5 Net investment return rate (%) 3.0 3.8 3.4 3.4 3.5 Based on German GAAP accounts of the operating entities Reported net income: Before profit transfer a Fitch estimates without Pensions Sicherungs-Verein Versicherungsverein auf Gegenseitigkeit Source: Companies annual reports 2016 GA s Performance in Line with Peers In 2016, GA s gross and net combined ratios were in the middle range of its peers and slightly higher than the market average. Whereas GA s loss ratio is better than the average market, the expense ratio is significantly higher. GA has improved its expense ratio in the past two years and we expect further improvements in 2017. GA s top-line growth was lower than of its peers and the market average. This was mainly driven by more selective underwriting. Key Figures for the German Life Insurance Sector, 2016 Alte Leipziger Nuernberger DEVK Gothaer German life sector IFS Rating A+ A+ A+ A n.a. Outlook Stable Stable Stable Stable Stable Total assets (EURm) 23,566 24,151 5,511 17,331 1,020,000 a GWP (EURm) 2,362 2,268 497 1,196 86,500 Change in GWP (%) 0.7-0.3-4,1-5.9-1.5 Change in APE (%) -4.7-6.2 2.4-6.1 0.5 Gross earnings (EURm) b 171 244 53 81 8,000 a Reported net income (EURm) 44 28 8 9 1,400 a Administration expense ratio (%) 1.6 3.3 2.7 1.9 2.3 Acquisition expense ratio (%) 4.6 6.0 5.4 5.4 4.8 Lapse rate (%) 8.1 4.7 5.2 4.1 4.3 a Equity and funds for future appropriation to actuarial reserve (%) With terminal bonus funds 9.7 8.4 7.5 5.5 6.9 a Without terminal bonus funds 7.7 6.6 6.6 4.4 4.8 a Net investment return rate (%) 5.2 3.2 4.1 4.7 4.4 Based on German GAAP accounts of the operating entities APE: Annual premium equivalent = new business s annual premiums + 1/10 single premiums a Fitch estimates b Gross earnings include reported net income (before profit transfer) and expenses for RfB (fund for future appropriation) Source: Companies annual reports 2016 GL s Capitalisation Weaker than Peers GL s equity and fund for future appropriation (including terminal bonus funds) to actuarial reserve ratio is below that of peers and of the market average. In 2016, GL s total premiums fell 5.9%, worse than the market average fall of 1.5%. GL has decreased its single premiums strongly from the previous year, based on its plan. The regular premiums decreased too, although not as strongly. The return on investment is in line with the peers and slightly lower than the market average, the net investment income has benefited from realised capital gains. 6
Capitalisation and Leverage 2012 2013 2014 a 2015 a 2016 Fitch s expectation Total equity (EURm) 1,530 1,572 1,812 1,889 2,061 Fitch expects Gothaer s capitalisation to Group Solvency I (%) 187 176 196 194 - remain strong in 2017. Group Solvency II ratio (%) - - - - 140 Financial leverage ratio (%) 15.1 15.0 14.9 19.0 13.7 Net leverage (non-life) (x) 3.3 3.5 3.1 3.0 2.8 Gross leverage (non-life) (x) 4.1 4.3 3.8 3.7 3.4 Asset leverage (life) (x) 13.8 12.6 12.7 13.2 13.4 Operating leverage (life) (x) 12.9 11.5 11.6 12.0 12.1 Net premiums written to equity (non-life) (x) 1.4 1.4 1.3 1.3 1.2 a Based on restated Gothaer accounts Source: Annual report, Fitch s calculations Strong Capitalisation Supportive of Rating Strong Prism FBM score Sufficient Solvency II ratios Increased financial leverage ratio Strong Prism FBM Score Gothaer maintained its strong score under Fitch s Prism FBM based at end-2016, with a small rise in both available capital and required capital. Available capital increased partly due to the higher unrealised capital gains. The required capital increased, mainly due to larger asset sizes and premium growth. ZZR expenses and persistent low investment yields will continue to put pressure on Gothaer s capitalisation, as is the case for German life insurance in general. Sufficient Solvency II Ratios At end-2016 Gothaer s reported Solvency II margin of 220%. Without an allowance for transitional measures on technical provisions the ratio would have been 140%. The life entity GL reported a SII ratio of 212%, 106% excluding transitional measures, and the main non-life entity GA reported a SII ratio of 202%. Financial Leverage Ratio Low and in Line with Rating Gothaer s financial leverage ratio (FLR) declined significantly to 14% at end-2016, after it temporary increased to 19% in 2015. The rise in Gothaer s FLR was caused by an issue of EUR250 million subordinated debt in October 2015 in advance of repaying its EUR250 million bond which became callable in September 2016. We expect Gothaer to maintain a stable FLR. 7
Debt Service Capabilities and Financial Flexibility (x) 2012 2013 2014 a 2015 2016 Fitch s expectation Fixed-charge coverage (x) 10.6 7.6 5.9 10.9 9.5 Fitch expects Gothaer s to maintain its coverage over 7x, which is in line with its rating category. a Based on restated Gothaer accounts Source: Annual report, Fitch s calculations Fixed-Charge Coverage in Line with Rating Category Gothaer s fixed-charge coverage was 9.5x in 2016, slightly lower than in the previous year (10.9x). Whereas interest expense increased to EUR31.9 million (2015: EUR25.5 million), EBIT grew to EUR303.9 million in 2016 from EUR279.1 million in 2015. In connection to the reduction in debt in 2H16 and the associated fall in interest expenses 2017, Fitch expects the FCC to increase again 2017. At end-2016, Gothaer s debt consisted of EUR156 million senior debt (2015: EUR156 million) and EUR334 million subordinated debt (2015: EUR525 million), including EUR20 million participation rights ( Genussrechtskapital ). 8
Financial Performance and Earnings 2012 2013 2014ª 2015ª 2016 Fitch s expectation Net income b (EURm) 107 104 114 141 164 Fitch expects further improvements in nonlife Pre-tax income (EURm) 224 141 122 248 underwriting results, lower investment 272 Premium growth (non-life) (%) 2.9 6.0 9.6 3.3 0.1 income and lower operating performance Combined ratio, net (non-life) (%) 97.4 101.1 97.7 96.2 95.6 in life. Operating ratio (non-life) (%) 88.9 93.8 92.2 88.7 90.8 Pre-tax return on assets (life) (%) 0.5 0.3 0.3 0.5 0.7 Return on equity (%) 7.9 6.7 6.7 7.6 8.3 ª Based on restated Gothaer accounts b Includes income attributable to minority shareholders Source: Annual report, Fitch s calculations GWP by Business Line Gothaer group, 2016 Health 21% Life 31% Source: Gothaer Non-life 48% Stable Profitability Strong non-life underwriting result Higher realised capital gains, higher net profit Increasing cost-efficiency and declining complexity Strong Non-Life Underwriting Result Non-life underwriting results were stable in 2016. The combined ratio improved slightly to 95.6% at end-2016 (end-2015: 96.2%). The loss ratio remained at the strong level of the previous year with 65.5% (end-2015: 65.4%), whereas the expense ratio of 30.1% improved slightly (end-2015: 30.8%). Life results remained affected by the negative effects of low interest rates, with a decline in new business premiums in 2016. However, Gothaer was able to achieve premium growth in disability and unit-linked business. The increasing cost of ZZR, which was EUR298 million in 2016 (2015: EUR204 million), was mainly financed through realisation of capital gains. Fitch expects the life results to remain under pressure should interest rates remain low, as ZZR charges will increase and investment income remains low. ZZR charges are expected to increase to EUR330 million in 2017. Higher Realised Capital Gains, Higher Net Profit Gothaer s investment income increased to EUR1,612 million in 2016 (2015: EUR1,214 million), partly driven by higher realised capital gains. The running yield decreased further in 2016. Gothaer s group net income improved 17% in 2016 to EUR164 million from EUR141 million, mainly driven by increased realised capital gains in the life and non-life segments. Increasing Cost-Efficiency and Declining Complexity Fitch considers Gothaer s diversification into different lines of business and distribution channels as a rating strength. This effect is partly offset by resulting higher overhead costs related to the more complex group structure. Gothaer has established an expense management programme, which measures key performance indicators by employee or policy. Furthermore, Gothaer aims to reduce the complexity of its operating model over all three major business lines. This includes the GoUnited efficiency programme, and the merger of GL and Asstel Lebensversicherung in 2014 as well as the merger of GA and Asstel Sachversicherung in July 2017. Fitch views the efficiency measures as steps to further reduce Gothaer s overall costs and as positive from a credit point of view. 9
Investment and Asset Risk 2012 2013 2014 a 2015 2016 Fitch s expectation Net investment income (EURm) 1,162 1,163 1,105 1,213 1,612 Fitch expects Gothaer s running yield on Return on investment (%) 4.8 4.6 4.1 4.3 5.7 investments to decline further in 2016, due Risky assets to surplus/equity (consolidated) (%) 96.3 89.1 62.9 80.1 62.6 to continued low bond yields. We do not Equity investments to surplus/equity 4.3 3.7 6.2 11.5 9.5 expect any major changes to the (consolidated) (%) investment portfolio in near future. Below investment-grade bonds to surplus/equity 47.0 37.3 29.7 34.3 33.4 (consolidated) (%) Goodwill and intangibles (% of total assets) 0.9 1.1 0.9 0.9 1.0 a Based on restated Gothaer accounts Source: Annual report, Fitch s calculations Investment Allocation 2016 Real estate 9% Loans 25% Affiliates 2% Cash 2% Source: Gothaer, Fitch Shares 1% Others 3% Rating of Fixed-Income Assets 2016 BB>/NR BBB 31% 5% Fixed income 58% AAA 20% Investment and Asset Risk Low Diversified investment portfolio Fixed-income investments of strong credit quality Exposure to peripheral eurozone and subordinated debt Diversified Investment Portfolio Fitch views Gothaer s asset allocation as prudent and well diversified. Gothaer s equity exposure remained low at about 1% in 2016. We expect Gothaer to maintain a low level of equity exposure. Real-estate investments accounted for about 9% of total investments by market values, with exposure diversified across a variety of sectors. The main part of Gothaer s real-estate investments are rental properties with stable cash flows. Investments in loans are mainly long-term privately placed bonds. These investments have high credit quality but are less liquid than market-traded bonds. Gothaer invested about 3% of its total investments in alternative investments, including hedge funds and renewable energy investments, mostly in the form of senior or subordinated debt. Overall, we expect no significant changes to Gothaer s investment management policy, and recognise the consistency and long-standing nature of the company s investment management processes. Fixed-Income Investments of Strong Credit Quality The average rating on Gothaer s bond portfolio remained at A+. At end-2016, 94.7% of its fixed-income portfolio was in investment grade. Exposure to Peripheral Eurozone and Subordinated Debt A 20% Source: Gothaer, Fitch AA 24% Gothaer increased its exposure to investments in peripheral eurozone government bonds to EUR2.8 billion (market value) at end-2016, up from EUR2.3 billion at end-2015. These investments accounted for 9.4% of total investments, which is above the average for the German insurance industry. The sovereign bonds are from Italy (49%), Spain (29%), Ireland (18%) and Portugal (5%). Gothaer continues to reduce its holdings of subordinated debt in both financial and corporate names. With a market value of EUR702 million at end-2016 (end-2015: EUR890 million) these investments accounted for 2.7% (end-2015: 3.1%) of total investments. 10
Asset/Liability and Liquidity Management (%) 2012 2013 2014 a 2015 2016 Fitch s expectation Liquid assets to technical reserves 93 95 106 103 108 Fitch expects Gothaer to continue to hold mostly highly Cash and cash equivalents to technical reserves 4.7 6.4 2.5 4.0 3.0 liquid investments. We expect the duration gap to remain stable in 2016. a Based on restated Gothaer accounts Source: Annual report, Fitch s calculations Exposed to Interest Rate Risk Duration mismatch Guaranteed interest-rate risk Strong liquid investments Duration Mismatch Like many German life insurers, GL s average duration of assets is shorter than that of its life liabilities. We see this as negative for the rating, since it increases Gothaer s exposure to interest-rate changes. GL has increased its asset duration significantly in recent years. At end- 2016 the average asset duration was 9.1 years, compared with 8.1 years end of 2015 and 5.3 years at end-2013. This has resulted in a decrease in the duration gap and it is now in line with the average gap in the German life insurance market. Exposed to Guaranteed Interest-Rate Risk A fixed discount rate is used to calculate the actuarial reserve for traditional German life insurance contracts. This discount rate is the GIR (Rechnungszins) and the regulator caps the maximum GIR that insurers can offer. The average in-force GIR without considering ZZR is about 2.9% for the industry, this fell to 2.5% after consideration of ZZR. The maximum permitted GIR for new business is 1.25%. In the persistent low interest-rate environment, it has become more difficult for German life insurers to meet their relatively high guarantees. A considerable portion of Gothaer s life liabilities is related to traditional life products with such relatively high guarantees. The average GIR in 2016 after consideration of ZZR was 2.5%, in line the market average. We expect that over the medium term GL s investment running yield (2016: 2.5%) will cover its GIR payments. However, continuing low interest rates would put Gothaer s operating results and capitalisation under pressure in the longer term. Strong Liquid Investments Fitch views Gothaer s liquidity risk as low: Gothaer has a large share of highly liquid investments in its fixed-income portfolio. 11
Reserve Adequacy (%) 2012 2013 2014 a 2015 2016 Fitch s expectation Prior-year reserve adjustment (PYRA; % of PYR) -4.1-4.6-1.7-4.2-2.5 Fitch expects Gothaer s reserving Loss reserve development to net earned premiums -4.6-5.1-1.8-4.3-2.6 practices to remain prudent. Net technical reserves to net premiums 143 146 137 136 136 Net technical reserves to equity 195 208 181 176 163 a Based on restated Gothaer accounts Source: Annual report, Fitch s calculations Strong Reserve Adequacy Positive track record on reserve adjustments Safety margins included in claims reserves Technical reserves stable relative to premiums Positive Record on Reserve Adjustments Gothaer s IFRS claims reserves practices have resulted in favourable prior-year reserve adjustments (PYRAs) since 2007. Gothaer had an average PYRA release of 3.4% of the prioryear reserve for the past five years (IFRS accounting). There is volatility in Gothaer s PYRA but the PYRA has been favourable in each of the past 10 years. Fitch expects Gothaer to maintain its prudent reserving practices. Safety Margins Included in Claims Reserves GA s non-life claims reserves include a safety margin for inflationary claims payment development and a specific margin for volatility of claims for any accident year. Carried net reserves are substantially above the best estimate level. The company s prudent reserving practice has resulted in good PYRAs in recent years. Technical Reserves Stable Relative to Premiums The net technical reserves/net written premiums ratio was 136% at end-2016 (end-2015: 136%). Fitch views Gothaer s reserving as adequate for its underlying business. 12
Reinsurance, Risk Mitigation and Catastrophe Risk Strong Reinsurance Programme Limits Catastrophe Risks Non-life reinsurance cover is tailored to the underwriting risk of the particular line, with cover consisting of several layers. Fitch considers Gothaer s overall reinsurance programme sophisticated and sufficient for its business. This view is underpinned by Gothaer s ability to smooth large catastrophe-related claims, as in 2013, when a large part of the storm- and floodrelated claims was absorbed by the reinsurance cover. In 2016, 40% of Gothaer s reinsurance recoverables were placed with AA -rated reinsurers, 57% with A rated reinsurers and 3% with BBB and below rated reinsurers. Sophisticated Risk Management In Fitch s opinion, Gothaer s risk management is effective and the company is able to provide relevant data and insight to limit exposure to larger risks. This is reflected in Gothaer s Own Risk and Solvency Assessment, preparation for Solvency II and frequent in-depth scenario analyses. Fitch views risk management as effective and fully integrated into Gothaer s operating processes. 13
Appendix A: Additional Financial Exhibits Gothaer Allgemeine Versicherung AG Based on German GAAP financials (EURm) 2012 2013 2014 2015 2016 Regulatory solvency margin (%) a 150 150 143 132 202 a Gross written premiums 1,466 1,527 1,617 1,703 1,723 Net combined ratio (%) 97.4 101.1 96.9 98.3 97.5 Equity 326 326 326 326 326 Equity/net earned premiums (%) 25.7 24.9 23.6 22.2 21.8 Net claims reserve/net earned premiums (%) 140.2 142.6 136.8 137.2 139.9 Net investment return rate (%) 3.8 4.1 4.1 5.2 3.4 Net income 62 36 63 82 53 a According to Solvency II for 2016 Source: Annual reports, Fitch s calculations Gothaer Lebensversicherung AG Based on German GAAP financials (EURm) 2012 a 2013 a 2014 2015 2016 Regulatory solvency margin (%) 166 160 151 134 106 b Gross written premiums 1,119 1,171 1,366 1,271 1,196 Administration expense ratio (%) 2.2 2.1 2.1 2.0 1.9 Acquisition expense ratio (%) 5.2 5.5 5.5 5.5 5.4 Equity 235 260 312 322 351 Equity and funds for future appropriation to actuarial reserve (%) With terminal bonus funds 6.4 6.4 6.1 5.5 5.5 Without terminal bonus funds 4.7 4.7 4.0 3.8 4.4 Net investment return rate (%) 4.0 4.0 4.2 4.2 4.7 Net income 26 25 25 10 9 a Gothaer Lebensversicherung only, before merger with Asstel Lebensversicherung in 2014 b According to Solvency II ratio without transitional measures Source: Annual reports, Fitch s calculations 14
Appendix B: Other Rating Considerations Below is a summary of additional rating considerations of a technical nature that are part of Fitch s rating criteria. Group IFS Rating Approach The non-life insurer GA and the life insurer GL are Gothaer s original insurers. Fitch views these entities as Core members of the group under the agency s group rating methodology, reflecting their full integration within Gothaer. GA has a profit-and-loss transfer agreement with the group s intermediate holding company, Gothaer Finanzholding AG. GA and GL share the same brand, management and distribution channels, and similar clients and back-office operations. They have the same IFS rating based on Fitch s evaluation of the strength of the group as a whole. Notching For notching purposes, the regulatory environment of Germany is assessed by Fitch as being effective, and classified as following a Group Solvency approach. Notching Summary Holding company Not applicable IFS ratings A baseline recovery assumption of Good applies to the IFS rating, and standard notching was used from the IFS anchor rating to the operating company IDR. Debt Not applicable Hybrids Not applicable Source: Fitch Hybrids Equity/Debt Treatment Hybrid Treatment Summary Hybrid Amount (EURm) Prism FBM (%) Fitch Prism FBM reg override (%) FLR (%) debt Gothaer Allgemeine DE000A168478 250 0 100 100 CAR: Capital adequacy ratio; FLR: Financial leverage ratio For CAR, % tells portion of hybrid value included as available capital, both before (Fitch %) and after regulatory override For FLR, % tells portion of hybrid value included as debt in numerator of leverage ratio Source: Fitch Exceptions to Criteria/Ratings Limitations None. 15
The ratings above were solicited and assigned or maintained at the request of the rated entity/issuer or a related third party. Any exceptions follow below. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided as is without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001. 16