TEXT-Fitch: German Life Insurance sector rating outlook remains stable

(The following statement was released by the rating agency)

Oct 01 - Fitch Ratings says in a new report that its outlook for the German life insurance sector remains stable. The agency considers German life companies to be well prepared to meet the sector's current challenges, and does not foresee a significant number of rating changes over the next 12-24 months. Fitch views the low interest rate environment and the pronounced volatility of the capital markets as the main challenges for German life insurers.

"There is considerable pressure on the insurance companies' ability to earn a decent return on their investments and to cover policyholders' guarantees," says Stephan Kalb, Senior Director in Fitch's insurance team. "However, Fitch expects rated German life companies to meet their guarantees, even in a prolonged period with low investment yields," adds Kalb.

Fitch has simulated run-off scenarios for life insurance portfolios and associated investment portfolios with different assumptions. The outcome of the simulation supported the agency's view that German life insurance companies can meet their guarantees, even if reinvestment yields fall below current market levels.

Overall, German life insurers' current investment portfolios are well balanced and able to generate sufficient investment yield to meet the guarantees of existing life insurance portfolios. In the unlikely event that investment yields were not sufficient to cover policyholders' guarantees there are also additional sources of income, i.e. positive risk and cost results that can be drawn to support the obligations towards policyholders. This scenario, however, would put considerable pressure on the profitability of German life insurance companies.

Fitch recognises in its ratings that German insurers have strengthened their balance sheets and reduced their exposure to risky asset classes over the past few years. German life insurance companies have less than 3% of their assets invested in Greece, Italy, Ireland, Portugal, and Spain's sovereign debt and even larger losses in the respective market values could be digested.

Fitch expects German new life premiums to decline in 2013 as a result of a normalisation in the German life market. While during 2009 and 2010 the German life market grew because of the strong growth of single premium business, in 2011 the business was benefitting from a positive pull-in effect from the reduction of the maximum guaranteed interest rate on 1 January 2012. The agency expects a similar positive effect before the introduction of unisex tariffs in December, but a slow-down thereafter.

Fitch's rating outlook assumes low economic growth for Germany for 2013 and 2014 and no further decline of long-term interest rates. Were the German economy to enter into a recession or if the sovereign debt crisis escalates, Fitch could revise the rating outlook for the German life insurance sector to negative.

Link to Fitch Ratings' Report: 2013 Outlook: German Life Insurance ((Bangalore Ratings Team, Hotline:+91 80 4135 5898 Jyothsna.BN@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Jyothsna.BN.thomsonreuters.com@reuters.net))