Fitch Downgrades Nuernberger's IFS Rating to 'A'; Outlook Stable

Published: 2024-12-17 05:40:30 ET NBG6.DE

Fitch Ratings has downgraded German insurers NUERNBERGER Lebensversicherung AG's (NLV), NUERNBERGER Allgemeine Versicherungs-AG's and NUERNBERGER Krankenversicherung AG's Insurer Financial Strength (IFS) Ratings to 'A' from 'A+'.

We have also downgraded the holding company NUERNBERGER Beteiligungs-AG's Long-Term Issuer Default Rating (IDR) to 'A-' from 'A'. All the Outlooks are Stable.

The downgrade reflects our expectation that the NUERNBERGER insurance group (Nuernberger) will report a net loss for 2024. We expect Nuernberger to report a profit in 2025, but anticipate the return on equity (ROE) to remain below 6%.

The ratings of Nuernberger reflect its very strong capitalisation, its strong company profile and its deteriorated financial performance.

Key Rating Drivers

Net Loss in 2024: Nuernberger announced that it will report a net loss of EUR65 million-EUR85 million for 2024. It reported a subdued ROE of 4.4% in 2023, which was below our former negative rating sensitivity of 6%. We expect this trend to continue for 2025. The losses are solely attributed to Nuernberger's non-life segment while results for the life, health and banking segments are expected to perform within management's forecasts. Excluding the non-life result, net income would be robust enough to achieve a ROE of more than 6%.

Fitch estimates that non-life underwriting losses will widen to EUR120 million in 2024 from EUR77 million in 2023, with a weakened net combined ratio of at least 115% (2023: 109%), due to reserve strengthening, natural hazards and persisting claims inflation in the motor business. Nuernberger has taken actions to improve the non-life segment's profitability including its withdrawal from unprofitable businesses. Despite this, Fitch expects Nuernberger to report non-life underwriting losses in 2025.

Very Strong Capitalisation: Nuernberger achieved a 'Very Strong' Prism Global score and a high Solvency II (S2) ratio of 250% at end-2023. Fitch expects Nuernberger's Prism score to be at least at the lower end of the 'Very Strong' category and the group S2 ratio to be at least 200% at end-2024.

Strong Company Profile: We expect Nuernberger to maintain its strong franchise in its unit-linked and disability lines. It is one of the top five unit-linked and disability providers in the German life insurance market. Nuernberger's unit-linked assets were about a third of its total life insurance assets at end-2023, versus the market average of 15%. The group reported strong growth in life new business, which increased 15% in 2023 (2022: 29%). We expect Nuernberger to report declining, but still strong, new business volumes for 2024.

Non-Life Reserve Strengthening: Nuernberger announced that it intends to strengthen its non-life technical reserves to enhance the profitability of its non-life segment. This suggests some weakness in non-life reserve adequacy. However, we regard this reserve strengthening as positive for future earnings stability.

Exposure to Natural Catastrophe Losses: Nuernberger has been consistently hit by natural catastrophe claims in recent years. We believe that the resulting losses have contributed considerably to the poor underwriting performance in non-life.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Continued net losses

A sustained material erosion in capital, as reflected, for example, in the S2 ratio falling below 160%

A weakening of Nuernberger's company profile, as reflected, for example, by limited life new business in disability and unit-linked

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

A sustained improvement in financial performance as reflected in a ROE of more than 6%

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.