German life insurers could see investment portfolio yields fall by 15 to 20 basis points in 2015, as low interest rates take their toll, Moody's has forecast.
Tightening returns will increase the pressure on the industry, which saw the investment running yield fall to an estimated 3.5% last year, 70 basis points less than in 2009.
"Investment returns currently remain sufficient to meet policyholders' guarantees, but a continuation of currently low interest rates will inevitably lead to returns falling below the average rate that life insurers have guaranteed to their policyholders," the rating agency warned in its German insurance outlook.
Moody's published its gloomy outlook for the German life industry on the back of the European Central Bank's quantitative easing announcement on 22 January. The bank's action pushed the benchmark yield on 10-year bonds down by 20bps to a record 0.3% in the following days.
German insurers are particularly exposed to low interest rates, because they have high guarantees in their back books and significant duration mismatch, which creates reinvestment risk.
Reported investment yield in 2013 was 4.6%, more than any other year since 2009, but this figure gives a distorted picture since it includes realised capital gains.
Insurers relied on the realisation of gains to cover a ballooning reserve requirement, the Zinzusatzreserve (ZZR), which reached a total amount of €20bn in 2014 ($22.88bn).
To counterbalance the corroding impact of low rates, German insurers have been shifting their portfolios towards new asset classes, such as infrastructure, real-estate funding and emerging market debt.
Germany's largest insurance group Talanx announced in January it is entering a joint venture with two banks to increase its allocation to alternative investments, such as infrastructure loans and private equity (IAR, 20 January, Talanx leads joint venture in alternative investments).
"Given the recent sharp decline in interest rates, we expect that this trend will accelerate in the next 12-18 months," Moody's wrote.