Reduction in German life insurers’ bonus rates credit positive; SII ratios under pressure

Written by Adam Cadle

15/01/2020

The 10 largest German life insurers have reduced their bonus rates for policyholders (not including bonuses paid out at maturity) for 2020 by approximately 20 basis points to 2.1% from 2.3% on average, a credit positive move due to combat the effect of falling interest rates over 2019 on capitalisation.

According to Moody’s Investors Service however, the sector is still likely to report materially lower Solvency II ratios for the end of 2019 compared with a year earlier because the 10-year German government bond yield fell by 90 basis points over the same period.

Interest rates fell significantly in 2019 and bottomed out in the third quarter of the year. Because the relevant reference rate for full-year 2019 additional “interest rate reserve” requirements (Zinszusatzreserve, or ZZR) was fixed at 30 September 2019, insurers' ZZR funding requirements will be materially higher than most market participants, anticipated a year earlier, putting a significant strain on life insurers' profit and loss statements and balance sheets.

Moody’s Investors Service expects German life insurers to report additional ZZR funding requirements of around €9bn in 2019 following €5.9bn in 2018, putting pressure on their earnings. However, it said it expects insurers to have generated realised capital gains by selling off higher-yielding fixed-income investments for funding purposes.

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