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Fitch Ratings Ltd. said that the profitability of German non-life insurers is under threat.
In a statement, Fitch attributed the strong results of 2006 to the benign tax environment. A revision of accounting rules last year forced insurers to account for the present net value of tax assets last year.
In the statement, Fitch said that, "a material share of this tax credit can be generally attributed to non-life insurers, which in turn has resulted in strongly declining effective tax rates and, in some cases, tax refunds for certain insurers."
"The one-off tax effects distorted the view on development of the underlying business," said London-based Tim Ockenga, director in Fitch's insurance group.
But this underlying business is struggling, according to Fitch. "In non-life insurance, the tax effect is more than over-compensating for the continuing erosion of the insurers' technical results, especially in home and motor insurance," said London-based Christos Stavrianidis, analyst in Fitch's insurance group, in the same statement.
Fitch said it expects a total combined ratio for the German non-life market of 97%-100% this year. "The agency notes that the integration of many life insurers into large groups will reduce the immediate effect on insurer financial strength ratings. The total profitability of the German insurance industry will nevertheless be negatively affected, as the non-life sector generates an over-proportional share of the industries' earnings," it said.
The impact of storm Windstorm Kyrill, which hit northern Europe in January, "will reinforce this decline despite the burden of the insured loss of €3 billion being mostly carried by the reinsurers," said in the statement.