FITCH expects run-off deals in in the German life insurance market to increase

The announcement of the GENERALI - VIRIDIUM transaction, the largest run-off deal in Germany to date, covering traditional-business reserves of about EUR 37 billion, reinforced FITCH's expectation that disposal of closed funds will be a growing theme in the German life insurance market, the agency said.

FITCH forecast that run-off specialists will manage more than half of closed life business in Germany by 2022, compared with about 25% currently, as insurers start to find the costs of managing shrinking portfolios an increasing burden. Run-off specialists such as VIRIDIUM can manage closed portfolios more efficiently by acquiring and integrating portfolios from several insurers to generate economies of scale.

As traditional saving products with long-term investment guarantees have become less profitable and more capital intensive due to low investment yields and higher capital requirements under Solvency II, many German life insurers have stopped offering them and put their portfolios into run-off. About EUR 130 billion of Germany's EUR 1 trillion life sector is in run-off, and FITCH thinks this could grow to EUR 180 billion by 2022.

The Italian insurance group GENERALI put GENERALI Leben into run-off in 1Q2018 as part of a restructuring of its German operations. GENERALI Leben is the group's largest German life entity, with traditional-business reserves of about EUR37 billion. The sale to VIRIDIUM is likely to be credit positive for GENERALI, reducing its exposure to interest rate risk and marginally strengthening its capital position. GENERALI says the transaction will add about 2.6 pp to its Solvency II ratio (end-2017: 207%). The group will still have a strong position in Germany, through GENERALI Deutschland, focusing on unit-linked, hybrid and protection products.

FITCH does not rate GENERALI Leben, but it said that its 'A-'/Stable Insurer Financial Strength ratings on GENERALI and GENERALI Deutschland will not be affected by the deal and remain constrained at two notches above the Italian sovereign rating (BBB/Stable). (See "FITCH Affirms GENERALI's IFS at 'A-'; Outlook Stable", published on 3 July 2018.)

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