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The German non-life insurance market is likely to experience a difficult financial year in 2023 due to several macroeconomic factors, such as the current inflation trend that has hit markets across the continent.
“[The] sector outlook for the German non-life insurance market is deteriorating for 2023,” the Fitch Ratings 2023 outlook said. “[This reflects an] expectation that inflationary pressure on property and liability claims will overweigh higher fixed-income investment yields.”
Negative credit migration will also likely contribute to the reduction of investment income, they added.
“Better reinvestment rates will take some time to be reflected in
bottom-line profitability.”
In 2019, the investment return rate was 3.0%, which fell markedly to 2.1% in 2020 – the beginning of the pandemic. The 2022 estimate was 2.6% (the same as 2021), with a forecasted return rate of 2023 of 2.8%, rising to 3.0% in 2024’s forecast.
There was some good news, though, with higher investment income compensating for declined underwriting margins.
“We expect rate increases to not keep pace with normalised claims frequency and high claims inflation, and that better reinvestment rates will take some time to be reflected in bottom-line profitability,” said Dr Christoph Schmitt, Director at Fitch Ratings. “However, once low-yielding fixed-income bonds will have matured in insurers’ portfolios, we will see a significant improvement in insurers’ investment income.”
The good economic conditions of Germany’s main insurance firms and their investment arms could also shield the industry from too much pain.
However, while investment returns were trending up, the country’s overall insurance market was still mixed.
However, there were positive signs. "Reinvestment yields are likely to exceed maturing fixed-income investment coupons until 2024 and we expect return rates to increase to 2.8% for 2023 and 3% for 2024,” the outlook said. “Increasing investment income helps insurers to mitigate the negative impact from claims inflation, but we believe that the additional investment income will be smaller than the decline in underwriting income.”
"The adjustment of supply chains and overall solid corporate finances should set
the stage for a resumption of investment growth in 2023.”
The ratings agency added that a sustainable investment income increases compensation for the lower underwriting profitability and would support a revision of the sector outlook to stable.
Germany has been one of the countries most affected by the energy crisis this winter, which could hit its economy further.
Economic factors for the continent’s economic powerhouse seem mixed too. The country’s unemployment rate is at 3.1%, expected to hit 3.5% in 2023, with inflation at 8.8% and expected to fall but stay high at 7.5% in 2023.
GDP growth in 2023 will contract – with a 0.6% fall. “Higher building and borrowing costs are expected to weigh on construction,” said the EU’s office of the Directorate-General for Economic and Financial Affairs report on its economy. “However, the gradual adjustment of supply chains and overall solid corporate finances should set the stage for a resumption of investment growth in the course of 2023.”
They add that while production of equipment was still increasing, energy intensive intermediate industries were cutting output. Investment dynamics were generally wavering.
However, major re/insurers in the market saw poor Q3 results for 2022 despite the outlook’s promises of a positive-though-middling 2023 – Munich-based giant Allianz’s asset management figures for Q3, as well as the nine months to the end of September, showed underwhelming numbers.
Asset management income for the quarter was at €792m, which was down by 10.2% on the same period last year when the figures were at €882m.
This was contrary to Allianz’s German competitor – Hannover Re – which said that it had a good quarter. The company said its AUM stood at €58 billion, with growth of 3.2%, which it said was down to strong operating cash flow that had offset negative effects from asset valuation.
"Companies will factor the current interest inflationary environment into
their product pricing (a positive) and reserving (a negative)."
Munich Re also posted good results – except for investments, the opposite of Fitch’s current predictions for 2023. It achieved a profit of €527m in Q3 2022. The quarter was marked by above-average expenditure for natural catastrophes. However, its investment fared worse than underwriting: the Group’s investment result dropped to €904m in Q3. The investment portfolio as of 30 September 2022 declined compared with the 2021 year-end figure.
In the autumn, AM Best said that rising interest rates would continue to have a negative impact on investment portfolios for insurers. However, Ken Johnson, Managing Director, AM Best added that this market could also have a somewhat positive impact on certain reserves, which get discounted at a higher rate.
“Companies will factor the current interest inflationary environment into their product pricing (a positive) and reserving (a negative). However, reserves that are discounted will see a benefit from using a higher rate as well,” he said.
"Over the long-term, we expect the crisis will accelerate investment
in energy security and the green transition."
One of German insurance’s main competitor to the south west, Swiss Re, said that the current energy crisis will likely push further renewables development in the country, which could be a boon for investors and see some growth as projects are ramped up and opportunities for the asset class increase.
“Over the long-term, we expect the crisis will accelerate investment in energy security and the green transition,” said a report from Swiss Re Institute on the issue. “Near-term, fiscal stimulus will cushion, but not avoid the recession in Germany that we expect as a result of the crisis and could set the tone for greater fiscal leniency across the euro area.”
But this won’t come without downsides: the stimulus will shift inflation risks to the mid-term, and reinforce for now the likelihood of more interest rate hikes from the European Central Bank, they warned.
