Fitch Ratings says in a new report that its rating outlook for the German non-life insurance sector remains stable. The sector outlook, an indicator of fundamental trends, is also stable. The agency considers German non-life companies to be well prepared to meet the sector's current challenges, and does not expect a significant number of rating changes over the next 12-24 months.

Fitch expects slightly lower growth in German non-life premiums for 2015 (2014: 3.0%) extending the current sustained period of premium growth. This follows the sector's strongest premium growth period since 2000 (2013: 4.0%; 2012: 5.1%; 2011: 4.5%), indicating that the sector continues to maintain underwriting discipline through the current prolonged period of low investment yields.

Fitch forecasts that the German non-life sector will report a gross combined ratio of 93% for 2014 and 92% for 2015 provided large weather and catastrophe-related claims remain within levels budgeted by insurers. This follows an increased gross combined ratio of 100.4% in 2013 (2012: 94.8%), which was driven by claims from exceptionally high natural catastrophe activity.

Fitch expects the sector to report a net underwriting result of more than EUR2.0bn for 2014 and 2015 following material premium rate increases. The sector reported a reduced, but still positive, net underwriting result of EUR0.3bn for 2013 (2012: EUR1.6bn) as adequate reinsurance protection significantly narrowed net losses stemming from natural catastrophes.

Competition in Germany has continued to decline over the past 12 months, and the sector has maintained underwriting discipline during 2014. Fitch expects that gross written premiums will have grown further in 2014 and the trend of increasing premium rates is likely to continue in 2015, although at a slower pace. Fitch believes that the sector will further strengthen underwriting profitability in 2015.

Investment returns are expected to decline to 3.4% in 2015 from 3.8% in 2014 (2013: 4.2%), reflecting the current low interest-rate environment. Fitch has seen some limited increase in risk appetite on the asset side of insurers' balance sheets, but this is not expected to result in a reversal of declines in investment income.

Fitch believes that the sector will maintain its strong reserving practices in 2015 as it is likely to have done for 2014, and that claims reserves will continue to increase. The agency believes that slightly less conservative reserving practices in the prior soft underwriting cycle may have resulted in some additional reserve strengthening since 2011, leading to slower improvement in net underwriting compared to growth in gross written premium.

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