Downgrades of German life insurers possible from 2017

The sector outlook for German life insurance remains negative due to the challenging operating environment, Fitch Ratings has said in a new report called ‘2017 Outlook: German Life Insurance - Low Interest Rates Put Capital Ratios Under Pressure’.

However, Fitch also said the pressures are manageable and the rating outlook, reflecting the cumulative position of the individual outlooks on rated German life insurers, is stable.

The stable rating outlooks are supported by insurers' diverse business mix, significant earnings from sources that are not interest sensitive and still strong capital positions.

“However, we are monitoring the situation closely and downgrades are possible from 2017,” the rating agency said. “There is considerable pressure on life insurers' ability to earn a sufficient return on their investments, but Fitch expects rated German life companies to meet policyholders' guarantees.”

Fitch said it has simulated run-off scenarios with different assumptions that show they could meet their guarantees for a prolonged period, even if interest rates stay low. “Nevertheless, there would be severe pressure on profitability, potentially threatening ratings,” it said.

German life insurers' capital buffers are being reduced by ongoing low interest rates. The buffers declined steadily between 2008 and 2016, and Fitch expects capital to remain under pressure in 2017.
Solvency II is challenging for most German life insurers. There may be some shocks when insurers report their 2016 results in spring 2017, particularly as insurers applying measures to smooth the transition to full Solvency II will also be required to disclose metrics without the benefits of transitional measures, it said.