S&P: Europe’s Insurers Weather Storm, But ‘Resilience Will Be Tested’
Europe’s insurance sector has “fared well relative to banks over the past two years,” a new report from Standard & Poor’s Ratings Services notes. As an example, the study – “European Insurers Withstand Global Economic Conditions, But Resilience Will Likely Be Tested Through 2012” – points out that “no rated insurer based in Europe has failed, neither has any insurer been rescued by the state. However, while insurers were not the cause of financial turmoil, they still suffer some of its consequences.”
Credit analyst Rob Jones stated: “Over the period, impairments on invested assets have substantially eroded insurers’ capitalization and profitability; in some cases leading to downgrades.”
S&P indicated that the situation is “compounded by weak economies. Among 160 rated insurance groups in Europe, downgrades number 24 and upgrades total nine in 2009 so far. Most of the downgrades relate to life insurers.”
“Despite positive trends in equity markets, lower credit spreads over recent months, and signs of recovery in economies around the world, we remain of the opinion that economic and financial market conditions will continue to put pressure on Europe’s insurers,” Jones added. This is reflected in our outlooks, 33 of which are negative and only six are positive.
S&P also concluded that “Europe’s reinsurers are better placed to weather the economic conditions than primary insurers. Premium pricing is sound for most lines of reinsurance business, which augers well for profitability this year and next. Reinsurers have been posting impressive underwriting results so far this year, and the crucial North Atlantic hurricane season is nearing its end.
“Their response to the impact of the financial turmoil on their marked-to-market balance sheets in the fourth quarter of 2008 was to quickly reverse the downward pricing trend. With their balance sheets looking much healthier today, upward pricing pressure has abated.
“Primary insurers typically did not respond in the same way, leaving a mixed picture around Europe in terms of the adequacy of rates. Rates in the U.K. and Italy are showing signs of significant progress in the key motor insurance line of business, whereas in Germany downward pressure still prevails, as it does in much of continental Europe.”
S&P also indicated that insurers’ capital adequacy “hit its low point at the end of the first quarter of 2009, when the capital adequacy of many insurers was inconsistent with their rating levels. This remains the case for several insurers, although the gap is currently considerably narrower for virtually all of them.
“Much of the improvement is down to equity value appreciation and narrowing credit spreads for the unrealized losses that existed at the end of the first quarter. Such gains are in addition to still-reasonable levels of underlying profitability. There are even isolated examples of reinsurers resurrecting their share buyback programs.
“We believe other insurers may close the gap by retaining earnings in 2010, or by raising new capital since equity and debt markets are open to them again at increasingly attractive cost.”
The report is available to RatingsDirect on the Global Credit Portal subscribers at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor’s public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Alternatively, call one of the following Standard & Poor’s numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011.
Source: Standard & Poor’s