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Fitch: New S2 Data Show Capital Disparity in German Life Market
July 12, 2017 / 11:41 AM / 4 months ago

Fitch: New S2 Data Show Capital Disparity in German Life Market

(The following statement was released by the rating agency) LONDON, July 12 (Fitch) The recent disclosure of Solvency II (S2) ratios excluding the benefit of transitional measures reveals big differences in the underlying capital positions of German life insurance companies, Fitch Ratings says. The data suggest that the insurers we rate are better capitalised than the market as a whole and does not lead us to materially change our view of their capitalisation based on our Prism factor-based capital model. Excluding transitional benefits, rated life groups all had ratios above 135% but more than one-third of life insurers in the market had ratios below 100%, meaning they were relying on transitional measures to meet end-2016 regulatory solvency requirements. Transitional measures are designed to smooth the impact of S2, which came into effect in 2016. European insurers had to publish new, more detailed S2 disclosures by 1 July, including own funds and solvency capital requirements without the benefit of transitional measures on technical provisions (TMTPs). We have stripped out the impact of TMTPs to analyse underlying S2 ratios for rated insurers in the German life sector, where large asset-liability duration gaps on business with long-term investment guarantees generate significant exposure to low yields. Until now, this exposure was largely hidden by local accounting and widespread use of TMTPs, which mitigate the increase in provisions for interest-sensitive business triggered by S2. We believe S2 ratios excluding TMTPs should be reasonably comparable between German life insurers, giving a meaningful indication of their relative capital strength taking account of their exposure to interest-rate risk. We have analysed these ratios for life insurance groups rather than solo entities, consistent with our view of capital management and fungibility between entities in these groups. Among rated groups with mainly life business, the S2 ratios excluding TMTPs give a similar picture to our existing view of capital based on Prism, with LV 1871 and Alte Leipziger clearly the strongest according to both S2 and Prism. <iframe allowfullscreen src="//e.infogram.com/german_life_s2_ratios?src=embed" title="German Life S2 Ratios" width="750" height="327" scrolling="no" frameborder="0"> Volkswohl Bund, Nuernberger and Stuttgarter appear weaker and we have previously indicated that their Prism scores may come under pressure as a consequence of persistent low investment yields. However, they all have headroom over the 100% regulatory minimum even without TMTPs (and very strong regulatory positions given that the regulator allows credit for TMTPs). Comparison of the newly disclosed S2 ratios with existing Prism scores does not lead us to materially change our view of capital for these insurers. We will update our analysis of each insurer's capital as part of our rating review cycle, continuing our focus on Prism scores and analysis of asset-liability profiles, supplemented with further analysis of S2 ratios and other information from solvency financial condition reports. Most of Germany's 84 life insurers use transitional measures and 29 companies (none rated by Fitch) would be below minimum regulatory requirements without them, according to the German regulator, BaFin. A proposed reduction in the ultimate forward rate used for valuing long-duration liabilities would increase this dependency by weakening underlying S2 ratios. Although BaFin allows insurers to use transitional measures, reliance on these to meet minimum requirements indicates underlying capital weakness on an economic basis, common in Germany given the prevalence of interest-sensitive business. Insurers in this predicament typically face the dual challenge of managing the run-off of the business that generates this weakness and adjusting their business model in response to low yields and S2 capital requirements. Insurers with liabilities that outlast the 16-year transitional measures may be particularly exposed to these pressures. The weakest companies may become acquisition targets for stronger insurers. Our sector outlook for German life insurance, an indicator of fundamental trends, is negative, reflecting the pressures from low investment yields. Contact: Stephan Kalb Senior Director, Insurance +49 69 768076 118 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main David Prowse Senior Analyst, Fitch Wire +44 20 3530 1250 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. Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com; 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. 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