December 6, 2017 / 2:13 PM / in 9 days

Fitch: German Life Insurance Sector Outlook Remains Negative Due to Low Rates Challenge

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Fitch 2018 Outlook: German Life Insurance here FRANKFURT/LONDON, December 06 (Fitch) The 2018 sector outlook for German life insurance remains negative due to the difficult operating environment, namely low investment yields and continued earnings pressure, says Fitch Ratings. Fitch expects that market interest rates are likely to remain at historical lows and constitute the biggest challenge for the German life insurance industry, in light of significant asset-liability duration mismatches. Fitch believes that the pressures are manageable despite the negative fundamentals and the rating outlook is stable, reflecting the cumulative position of the individual Outlooks on rated German life insurers. Insurers' diverse business mix, significant earnings from sources that are not interest-sensitive and still strong capital positions support the Stable rating Outlooks. About 70% of German life companies applied to use transitional measures on technical provisions for their Solvency II reporting. If the effects of transitionals are stripped out, the median solvency capital requirement (SCR) was 180%, but 13 out of 84 reporting companies would not have reached the minimum SCR. Fitch does not expect ratios to have deteriorated in 2017. Financial market conditions have improved, as has the structure of underlying insurance portfolios, with lower dependence on guarantees. The main challenge facing German life insurers from continued low rates are asset-liability duration mismatches, which mean that low reinvestment yields are eroding the differential between investment income and policy obligations, putting pressure on investment earnings. Consequently, earnings contributions from underwriting and associated expenses have become more important as both are the result of conservative life insurance policy calculations and constitute a stable contribution to gross income, providing a further buffer for life insurance companies to finance policyholder guarantees. However, low interest rates are reducing German life insurers' capital buffers, which have declined steadily between 2008 and 2017. Fitch expects capital to remain under pressure in 2018. Nonetheless, steps are being taken to alleviate this as new business is shifting towards products with lower capital requirements, such as products with lower investment guarantees, unit-linked business and products that focus on biometric risks. Customers need time to adapt to the new products and this is holding back life insurance sales. New business is also suffering from low market interest rates that reduce the attractiveness of most life insurance products. The full Outlook report is available at www.fitchratings.com or by clicking the link above. Contact: Dr Stephan Kalb Senior Director +49 69 768076 118 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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