Mario Draghi, European Central Bank president

Mario Draghi’s plan to revitalise the eurozone through quantitative easing will further undermine the solvency of life assurance and pension companies in the continent’s largest economy, a leading credit rating agency has warned.

In a report published on Wednesday, Moody’s said the “profitability and solvency” of the industry in Germany would come under further strain from the European Central Bank’s bond buying.

German life companies, which have estimated liabilities of more than €700bn, sell policies that offer annual guaranteed returns to policyholders, who use the products to save for retirement.

Similar products are sold across Europe, but the guarantees have been particularly generous in Germany.

To meet the guarantees, the insurers invest heavily in bonds. But low interest rates have reduced the yields the assets offer, making it harder for the companies to meet their commitments.

The ECB’s plan to buy €60bn worth of bonds each month has further depressed yields, giving the industry greater concerns. The yield on Germany’s benchmark 10-year bond has fallen to 0.35 per cent.

To help cope with the pressure, insurers have been reducing the returns they pledge to policyholders. The maximum guarantee sanctioned by authorities in Germany is now 1.25 per cent. The industry has also sought to sell more products that have no guarantees — effectively placing the investment risks with policyholders instead of shareholders.

However, the insurers still need to meet commitments from policies sold in previous years, for which the guarantees have been as high as 4 per cent. The lower guaranteed rates apply only to new policies.

“Low interest rates and the ECB’s decision to introduce quantitative easing will put further pressure on insurers’ profitability and solvency in the coming months,” said Benjamin Serra, senior credit officer at Moody’s. “They are increasingly constrained by the high level of guarantees sold in the past.”

Persistently low interest rates mean the companies need to reinvest at lower yields: although the life companies’ liabilities stretch out for more than two decades, the duration of their assets is about between five and 10 years. The problem will get worse the longer interest rates remain low.

Moody’s said 2015 would be a “pivotal and challenging year” for Germany’s life assurance industry and maintained a “negative outlook” for the sector.

The forthcoming EU-wide Solvency II capital requirements for insurers, which take effect next year, pose another problem.

European regulators have agreed to phase in elements of Solvency II over several years to ease the burden on the German life industry. Even so, Moody’s said in its report: “Some smaller life companies are currently too thinly capitalised to comply.”

Moody’s has credit ratings only on relatively large insurers in Germany — Allianz and Munich Re — and local subsidiaries of the big overseas companies Axa, Zurich and Generali.

Yet the industry in Germany is highly fragmented and has dozens of smaller, less diversified mutuals.

Moody’s added: “Any failure of one or several players in the German market could have reputational costs for the entire sector.”

Across Europe, one in 12 European insurance companies does not hold enough capital to comply with Solvency II, according to stress tests carried out last year by the European Insurance and Occupational Pensions Authority.

Still, the EIOPA, whose tests were based on balance sheets as of the end of 2013, said overall the sector was “generally sufficiently capitalised in Solvency II terms”.

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