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German Insurers Face Losses From Low Rates, Moody's Says

German life insurers, which have traditionally sold contracts with guaranteed returns, may face losses if interest rates stay at current levels, Moody’s Investors Service said.

“The industry will have to book around 6 billion euros ($8.3 billion) of additional interest rate reserves at year-end 2013, after 5 billion euros in 2012,” Moody’s analysts including Benjamin Serra said in a report today. “The interest rate reserve that German life insurers have recorded since 2011 accelerates recognition of losses in company accounts.”

German life insurers are seeking ways to scrap costs tied to the statutory minimum returns on life-insurance products that have eroded earnings as interest rates remain near record lows. German life-insurance products typically have lifetimes of a decade or more and guarantee customers a minimum return of 1.75 percent. That compares with a 1.785 percent yield of 10-year German government bonds, up from a record low of 1.17 percent reached last year.

The interest rate reserve, dubbed Zinszusatzreserve, was introduced for Germany life insurers in 2011 and requires the industry to bolster policies with high guarantees.

“If interest rates remained at their current level for the next decade, the incremental reserve requirement would grow to between 40 billion euros and 90 billion euros by the end of 2023, requiring the industry to use much of its current level of unrealized asset gains to preserve regulatory solvency,” Moody’s said. Not all German insurers face the same level of risk, it added.

Capital Gains

Insurers plan to offset the negative accounting impact of the interest rate reserve requirement mostly by realizing capital gains, Moody’s said. It estimates unrealized capital gains for the German life industry amounted to 80 billion euros after the increase in rates in the first nine months of 2013, an amount that “tends to decrease as investments mature.”

German life insurers rated by Moody’s, including units of Allianz SE (ALV), Axa SA (CS), Munich Re, Assicurazioni Generali SpA (G) and Zurich Insurance Group AG (ZURN), “all present better than average characteristics” to help them cushion the impact, Moody’s said.

The Finance Ministry in Berlin cut the statutory minimum interest rate for new policies to 1.75 percent effective in 2012 from 2.25 percent to help the industry.

Average Guarantees

Still, high guarantees offered to policyholders in the past result “in one of the highest levels of average guarantee on the in-force business in Europe” at 3.3 percent currently, Moody’s said.

Allianz, based in Munich, and Ergo Versicherungsgruppe AG, the primary insurance unit of reinsurer Munich Re, in July introduced new life insurance products to cope with the challenge. Both control about a fifth of the German life-insurance market, Europe’s third largest after the U.K. and France, with about 87 billion euros of premiums.

Other life insurers in Germany, including Ergo’s subsidiary Victoria Leben and Delta Lloyd NV (DL)’s German life-insurance unit, have stopped selling new business. Herbert Haas, chief executive officer of Talanx AG (TLX), told newspaper Sueddeutsche Zeitung in an interview on Oct. 1 that Germany’s third-biggest insurer is evaluating closing its HDI Leben life-insurance unit for new business among other options.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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