This year will be a challenging one for European insurers and reinsurers, according to reports by credit rating agencies Standard & Poor's Corp. and A.M. Best Co. Inc.
In its report "Tough Times Ahead for Europe-Based Global Multiline Insurers," S&P said the economic downturn affected the 2008 balance sheets and profitability of global multiline insurers based in Europe and that results for the first quarter of 2009 showed further writedowns.
"The outlook for the remainder of the year remains, in our view, subdued," the report noted.
Best's analysis of Europe's 10 biggest insurance groups and top five reinsurers found that sharply reduced investment income coupled with increased realized and unrealized losses as a result of mark-to-market accounting practices has "significantly eroded capital," particularly among those groups with life operations.
S&P studied seven Europe-based global multiline insurers: The Hague, Netherlands-based AEGON N.V.; Munich, Germany-based Allianz S.E.; Trieste, Italy-based Assicurazioni Generali S.p.A.; London-based AVIVA P.L.C.; Paris-based AXA S.A.; Amsterdam, Netherlands-based ING Groep N.V.; and Zurich, Switzerland-based Zurich Financial Services Group.
S&P said the tough economic climate could lead to "stagnant nonlife premiums, falling new life business, higher life policy lapses and increased nonlife claims severity."
It said those companies with a nonlife emphasis have shown more resilience than those with a life focus because they posted sound underwriting profits for 2008.
"We believe that these companies' future resilience depends on their continued ability to maintain pricing discipline," the S&P report said.
There are signs that, after further rate softening in 2008, the market is beginning to harden, S&P said.
S&P said that, for 2009 and 2010, companies active in property/casualty insurance should be able to manage effectively the cycle and post combined ratios "comfortably" below 100%, barring any major catastrophes.
Best said that nonlife insurers are likely to report further increases in combined ratios and are exposed to growing natural catastrophe activity. This, combined with the strong competition in the market, "constrains insurers' ability to maintain earnings through price increases," it said.
The agency said poor current liquidity in the credit markets and limited access to debt and equity funding means that reinsurance offers an alternative form of capital for the insurers.
This should boost reinsurers' prospects for premium income. But Best noted that pricing has yet to "universally harden based on 2009 renewals to date," and added that "future large catastrophic losses and/or investment losses could further strain reinsurers' capital cushions."
S&P said it believed the insurers covered by its report were in a better position to manage the economic downturn today than they would have been in the past.
S&P said, however, that while stock markets appear to have rebounded since the lows of mid-March, the European insurance sector's market capitalization is still down 50% compared with Jan. 1, 2008.
On the whole, S&P said, European global multiline insurers have taken comprehensive measures to protect their capital bases, such as the suspension of share-repurchase programs, for example.
Capitalization, though, has become a relative weakness for the group of insurers studied for the report, with the exception of AEGON and ING, which have received significant capital injections, S&P noted.
Taken from Insurance News, 15/05/09
