April 27, 2017 / 1:54 PM / 4 months ago

Fitch: Yields, Solvency 2 to Spur German Life Insurance Run-Offs

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Run-Off Deals in German Life Insurance to Rise here FRANKFURT/LONDON, April 27 (Fitch) Low investment returns and higher capital requirements on some business could drive a two-thirds increase in the volume of German life insurance portfolios in run-off over the next five years, Fitch Ratings says. Firms will initially probably choose to continue managing these portfolios internally, but in the medium term we expect transfers to specialist run-off platforms to accelerate, accounting for around half the overall increase. Our rating methodology for insurers in run-off is the same as for those with continuing business. But the lack of an ongoing franchise carries additional risks, including a reduced ability to develop profitable new business and potential challenges in raising capital if needed. Typically, these risks would not be consistent with Insurer Financial Strength ratings and Issuer Default Ratings above the 'BBB' category, and higher-rated firms that entered run-off could therefore be downgraded. These risks would not necessarily restrict the rating of a run-off specialist or of a firm that only placed some of its business in run-off. Around 9% (EUR90 billion of assets) of the German life insurance sector is already in run-off and we believe this could grow to around EUR150 billion by 2022 as low investment yields continue to put pressure on the profitability of traditional products with minimum guaranteed returns. These products also have higher capital requirements under the new risk-based Solvency II framework, making them less profitable. A growing regulatory burden and increasingly costly IT systems will also make smaller non-guaranteed portfolios unprofitable, making them candidates for run-off. Putting portfolios into run-off can be attractive because of the potential cost reductions. Acquisition costs can fall substantially because no new business is being written. If the insurer uses third-party distribution channels the impact will be immediate and the only remaining acquisition costs will be those related to after-sales service. Insurers with a run-off portfolio will also usually be able to strengthen profitability by making lower bonus payments to policyholders. This is because most firms make bonus payments above the legal or contractual minimum to help attract new business, which will no longer be necessary in run-off. Administrative costs will probably fall in the short term when a portfolio goes into run-off, but may become a burden in the longer term as the underlying insurance portfolio shrinks. The rising burden of fixed costs in a run-off portfolio could make insurers more likely to consider a transfer to a run-off specialist in the longer term, as these companies can benefit from economies of scale as more portfolios are transferred. If these benefits are shared with the seller a transfer may prove more profitable for the seller than keeping the portfolio. The transfer market in Germany is fairly undeveloped and it will take time for pricing to evolve and the necessary expertise to develop, but we expect assets under management among external run-off specialists will more than double to EUR60 billion from EUR25 billion over the next five years. For more information on our expectations for the sector, see "Run-Off Deals in German Life Insurance to Rise" published today and available at www.fitchratings.com or by clicking the link above. Contact: Dr Stephan Kalb Senior Director Insurance +49 69 768076 118 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Dr Christoph Schmitt Director Insurance +49 69 768076 121 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com; Rebecca O'Neill, London, Tel: +44 203 530 1697, Email: rebecca.oneill@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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. 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