Global credit rating agency AM Best has announced that it is maintaining its negative outlook on the German life insurance segment.
According to the agency this decision is mainly due to potential for lower new business growth driven by uncertain economic conditions, as well as increased investment volatility and potential for credit losses.
Best notes that Germany’s economic trajectory is dependent on the development of a number of headwinds, which includes continuous supply chain disruptions, actions across the globe to tighten monetary policies, and both the direct and indirect effects of the conflict in Ukraine.
While the ultimate impact of geopolitical tensions remains uncertain, Best stated that it believes that there are significant downside risks to the German economy. The International Monetary Fund (IMF) has revised downwards its forecast for Germany’s gross domestic product (GDP) to 1.2% for 2022 and revised its inflation expectations upwards to 7.7%, both of which support an increasingly more pessimistic economic outlook.
Moreover, Best highlights that increased market volatility during the first nine months of 2022 has led to large unrealised losses in most held asset classes. Unrealised losses are being attributed to the combined effects of rising interest rates, widening credit spreads, and volatile equity market performance, which have led to a decrease in the market values of investments. If economic conditions continue to deteriorate, insurers’ investment portfolios may see further losses.
However, Best states that while unrealised losses impact the balance sheet, most insurers benefit from effective asset and liability management within their enterprise risk management programmes, strong capital buffers and adequate liquidity profiles to help them manage through this period and avoid crystallising these unrealised losses.
Best concludes by stating that it expects the German life insurance segment to remain pressured by the low, though rising, interest rate environment, as well as by economic headwinds and investment volatility. However, the rating agency noted that a successful transformation towards more capital efficient strategies in a context of sustained business growth and rising interest rates could lead to a revision of the outlook to Stable.
