The outlook for the German life re/insurance industry remains negative due to a combination of low interest rates and high guaranteed returns attached to past policies, while modest price increases have helped the property and casualty (P&C) sector stay stable, according to Moody’s Investors Service.
Moody’s recognised the relatively strong economic conditions that German re/insurance companies benefit from, with 2.2% economic growth expected over 2018, but felt that this support was offset by the challenging operating environment they face.
The rating agency added that interest rates in the region also remain stubbornly low, while competition in both the life and P&C re/insurance markets remains stiff.
“For German life insurers, low interest rates remain a key credit challenge, as their investment portfolios consist largely of fixed income securities,” said Dominic Simpson, a Vice President and Senior Credit Officer at Moody’s.
“Even if interest rates continue to rise, a significant duration mismatch between their assets and liabilities will force them to continue to reinvest maturing assets at lower yields for some time,” he said.
Accordingly, life insurance companies have been making changes to their business mix, such as emphasising the sales of less interest-rate sensitive products, but Moody’s expects the positive effects of these efforts to remain modest and noted that traditional life insurance savings products continue to dominate reserves.
Solvency II ratios for German life re/insurers are also high but not especially economic, standing at 382% at year-end 2017, but falling to 250% when excluding transitional measures designed to help phase in Solvency II. This is expected to fall further as the ultimate forward rate reduces.
On the P&C side, Moody’s expects the industry to report a combined ration below 100% absent any further large catastrophe losses, with profitability supported by modest price increases.
In terms of capitalisation, Moody’s considers the German P&C industry to be comfortably positioned and less vulnerable to the low interest rate issues that have affected life re/insurers.