Fitch affirms German mutual Gothaer's 'A' rating

The outlook on the ratings is stable. Fitch has also affirmed GA's E250m subordinated debt at 'BBB'.

GG is a mutual insurance group, which generated gross written premiums of E4.0bn (2009: E4.2bn) in 2010, making it one of the larger German mid-sized insurance groups. GG focuses on private customers and SMEs.

Products are distributed via tied agents and independent financial advisors and, to a small degree, through co-operating banks. With GWP of E1.4bn, GA is GG's main non-life insurer. The life segment consists mainly of GL (GWP: E1.2bn). The health insurer, Gothaer Krankenversicherung AG, constitutes the third group segment with GWP of E0.8bn.

The affirmation reflects Gothaer Group's strong and resilient capitalisation in 2010 and Fitch's expectations that GG's net income will moderately increase, and that GA's combined ratio will slightly improve in 2011.

GG's shareholder funds increased to EUR1.2bn at end-2010 from EUR1.1bn at end-2009. GL's free funds for future appropriation also grew by about 10%. As a result, GG's capitalisation improved during 2010, as evidenced by a higher regulatory solvency margin of 151% at end-2010 (2009: 147%). Fitch views GG's capitalisation as adequate for its ratings.

Fitch views 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. The ratings reflect the group's robust capitalisation, strong business position and well-developed risk management, which are partly offset by the competitive German non-life market conditions and GL's weak development of regular premiums business.

GA's gross combined ratio deteriorated to 98.2% (2009: 94.9%), while the German insurance association reported a weakened gross combined ratio of 98% (2009: 95.6%) for the non-life market.

GL's gross written premiums declined 21.0% in 2010 compared with the 7.1% growth reported by the German life market. However, GL's 2009 GWP was driven by favourable single premium business, which led to an 18.3% GWP increase in 2009. In 2011, GL's new business volume increased by more than 25% for the first five months compared to the prior year. GG's reported net income increased to EUR91.0m (2009: EUR78.0m).

Fitch said significant improvements in GG's underwriting profitability, resulting in a net combined ratio below 94% and investment return higher than 5% could result in an upgrade. A decline in capitalisation with the regulatory solvency margin falling below of 130%, weakening of GG's market position and a net combined ratio higher than 105% could result in a downgrade.