MOODY'S ASSIGNS FOUR MORE GERMAN LIFE COMPANY INSURANCE FINANCIAL STRENGTH RATINGS
Moody's Investors Service assigned a further four insurance financial strength ratings in the German life insurance market, bringing the total number of new life company ratings up to seven. The new ratings are Aa2 (middle range of excellent financial strength) for Victoria Lebensversicherung AG, Aa2 (middle range of excellent financial strength) for Deutscher Herold Lebensversicherung AG, Aa3 (lower end of excellent financial strength) for Gerling-Konzern Lebensversicherung AG and A1 (upper end of good financial strength) for IDUNA Vereinigte Lebensversicherung AG. The previously assigned ratings were Aaa for Allianz Lebensversicherung AG, Aa2 for Hamburg-Mannheimer Versicherungs AG and Aa3 for R&V Lebensversicherung AG. Moody's intends to assign insurance financial strength ratings to further German life insurers in the coming months.
The assignment of these ratings follows Moody's research into the German life insurance market, published in its "German Life Insurance Industry Outlook" in June 1998. Moody's believes that the German life insurance market entered a new era with the deregulation of pricing that occurred after the implementation of the Third EC Life Directive in July 1994. This allowed competition to develop between life insurers which is slowly beginning to change products and distribution in the life insurance market.
Nevertheless, so far, there has been little change to the structure of the market that has existed for the last few decades. Distribution is still largely conducted through tied company sales-forces, although brokers and multi-company agents are becoming more important. Products still largely consist of the traditional Kapitalversicherung (endowment policy) structure with a mixture of guaranteed bonus and non-guaranteed annual and terminal bonus, although there is a sharply increasing volume of both single premium policies and deferred and immediate annuities. Unit-linked policies (Fondsgebundenen Lebensversicherung) remain a small part of the market, although they are expected to show increasing growth. The current relatively low interest rate environment is a potential cause of spread deficiency risk because of the interest rate guarantees contained in most German life and pensions policies, although Moody's believes that the current industry standard guaranteed rate of 4% may be lowered in the near future. Asset quality and solvency strength vary from company to company, although Moody's notes that the recent disclosure of hidden reserves by the German life industry has revealed a strong level of market value capitalisation and solvency in many companies (for an analysis of solvency strength and spread deficiency risk in Germany, France and the UK see Moody's recent Special Comment entitled "One of Life's Great Mysteries: What Does the European Life Insurance Solvency Ratio Mean ?"). Asset quality is also strong in many companies. Going forward, competition is likely to increase based on product offerings, distributional effectiveness, expense structure and technology, and investment performance, in addition to premium rates and bonuses, and divide the market more clearly into losers and winners.
Victoria Lebensversicherung AG's ("Victoria Leben") Aa2 insurance financial strength rating reflects its strong market position as Germany's fourth largest life insurer by total asset size in 1997, its very strong capitalisation on a market value basis and its reasonable operational efficiency as evidenced by its low lapsation ratio and its average expense ratio. Further strengths reflected in the rating are Victoria Leben's unusually diversified distribution capability, using mainly tied agents, but also a significant amount of distribution through brokers and banks. Victoria Leben has a well-established presence in the group life market and has developed strong relationships with many major German corporates. Victoria Leben is also one of the most technologically sophisticated German life insurers, after a heavy investment spend on IT in the last few years. Victoria Leben is part of ERGO, the German primary insurance group, which was created in 1997 and comprises the Victoria, Hamburg-Mannheimer, DKV and DAS groups; it is owned 54% by Munich Re. Hamburg-Mannheimer is the other major life insurer within the ERGO group. Looking to the future, cost savings should be achievable over the next two years, resulting from the creation of ERGO and the possibility for cost savings to be made from the merger of asset management activities between Victoria Leben, Hamburg-Mannheimer and Munich Re, together with possible cost rationalisation in claims processing with Hamburg-Mannheimer. On the less positive side, Victoria Leben has lifted the equity weighting in its investment portfolio, which, while improving investment performance recently, also exposes the company to more investment volatility since equities tend to be more volatile than fixed income investments. In the context of the guaranteed interest rates attaching to most German life and pensions policies, and the need actively to match assets and liabilities, equities can introduce some uncertainty. Moody's notes that Victoria Leben employs a prudent and successful hedging policy in order to preserve unrealised gains on its equity investments in this respect.
Gerling-Konzern Lebensversicherung AG's ("GKL") Aa3 insurance financial strength rating reflects its strong capitalisation on a market value basis and its excellent operational performance. In Moody's opinion, GKL is one of the best managed life companies in Germany, as shown by its very low level of lapsation, very low expense ratio, the high quality reputation of its own sales-force and the successful use of brokers to distribute a major part of its sales. GKL also benefits from being a major provider of group life insurance and shares relationships with major German corporates with its non-life insurance sister company which is a major provider of German industrial non-life insurance. GKL has also managed its level of bonus payments prudently at a time when some of its competitors are making excessively high bonus declarations in order to attract new business. Asset quality is strong with a conservative exposure to equities which tend to be more volatile than fixed income investments, which makes them less suitable for asset/liability matching which is required, in Moody's opinion, for the relatively high level of interest rate guarantees which is a normal feature of German life and pensions policies. On the less positive side, GKL has made limited attempts at selling its innovative products, such as unit-linked policies (Fondsgebundenen Lebensversicherung) and dread disease insurance (Dread Disease-Deckung), although this is not a particular disadvantage since German consumers have not yet shown a strong preference for innovative products. GKL offers reasonably high early surrender values on its policies which could inhibit its financial flexibility, although this is largely offset by arrangements with its sales-force for the repayment of sales commission in the event of the early cancellation of policies. In addition, GKL, as noted above, has a very low level of lapsation. GKL is part of the Gerling group which includes significant non-life and reinsurance operating companies.
Deutscher Herold Lebensversicherungs-AG's ("Deutscher Herold") Aa2 insurance financial strength rating reflects its position as Germany's sixth largest life insurer by total asset size in 1997, its strong capitalisation on a market value basis and its successful distribution through Deutsche Bank branches as well as through its own sales-force and brokers. The rating also reflects the support of its parent, Deutsche Bank AG (rated Aa1 for long term debt which is currently under review for possible downgrade), as one of its core subsidiaries and the beneficiary of a statement of support (Patronatserklaerung) from Deutsche Bank. Deutscher Herold's Aa2 rating is also under review for possible downgrade reflecting the fact that Deutsche Bank's Aa1 rating was placed under review for possible downgrade on November 23rd following the announcement of its intention to acquire Bankers Trust, the New York based bank and the United States' eighth largest banking group.
Deutscher Herold's operational efficiency is moderate in comparison with its competitors as shown by its average expense ratio and its somewhat high lapsation ratio. Asset quality is high, although a reasonably high proportion of its investments is in equities and mutual funds, which may be more volatile than fixed income investments during times of market uncertainty. Deutscher Herold has successfully developed the sale of unit-linked policies (Fondsgebundenen Lebensversicherung) which constitute a growing part of its portfolio.
IDUNA Vereinigte Lebensversicherung AG's ("IVL") A1 insurance financial strength rating reflects its position as Germany's eighth largest life insurer (and Germany's largest mutual life insurer) and its strong capitalisation on a market value basis. IVL has a well-established franchise with certain sections of German society, in particular blue-collar workers, craftsmen and to some extent, civil servants, although sales growth seems to be somewhat restricted in these socio-economic segments, as evidenced by the fact that IVL has been gradually losing market share in recent years. Its principal products are the traditional regular premium Kapitalversicherung (endowment) policies, although new business has a growing proportion of single premium and annuity policies. The rating also reflects the challenges facing IVL's management, including its relatively high level of lapsation and a very high expense level. IVL has responded to its gradual loss in market share by merging with other mutual life companies, including NOVA Lebensversicherung AG in January 1998 and the intended merger with Signal Lebensversicherung AG in mid-1999. These mergers are positive, in Moody's opinion, and will help to stem IVL's loss of market share and should provide the opportunity for cost saving through the rationalisation of administrative operations between the merged entities. Asset quality is good although IVL has a relatively high proportion of mortgages and equities/mutual funds. IVL's distribution is mainly through its own sales-force, although brokers and Strukturvertrieb are also used to some extent.
Victoria Lebensversicherung AG is headquartered in Dusseldorf, Germany. It had total assets of DM35 billion and surplus assets (shareholders' equity and the free part of the RfB plus hidden reserves) of DM7.7 billion at December 31, 1997.
Gerling-Konzern Lebensversicherung AG is headquartered in Cologne, Germany. It had total assets of DM26.9 billion and surplus assets (shareholders' equity and the free part of the RfB plus hidden reserves) of DM4.3 billion at December 31, 1997.
Deutscher Herold Lebensversicherungs-AG is headquartered in Bonn, Germany. It had total assets of DM26.9 billion and surplus assets (shareholders' equity and the free part of the RfB plus hidden reserves) of DM4.6 billion at December 31, 1997.
IDUNA Vereinigte Lebensversicherung AG is headquartered in Hamburg, Germany. It had total assets of DM25.1 billion and surplus assets (the free part of the RfB plus hidden reserves) of DM4.3 billion at December 31, 1997.
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