Challenging conditions in Europe test insurers’ creditworthiness: S&P

For European insurers, 2017 could be pivotal as the way they will respond to ultra-low interest rates, difficult economic conditions in certain regions, and political uncertainties could have a long-term effect on risk profiles and overall creditworthiness, according to S&P Global Ratings.

How insurers adapt to the lower-for-longer interest rate environment will remain a key focus, analysts wrote in a report titled “Recent Investor Discussions Highlight Key Risks For Europe's Insurers”.

The analysts assume that the earnings potential and capital adequacy of insurers most exposed to interest-rate risks will continue to gradually weaken and could eventually weigh on ratings. Insurers are responding to interest-rate risks via the likes of guaranteed rate reductions on new business and a shift to unit-linked sales. In addition, they are reducing crediting rates on the inforce book, creating additional reserve buffers, tightening their management of asset-liability duration mismatches, and introducing policyholder reserve reinforcements.

The effects of current and forecast interest rates directly impacts prospective retained earnings and hence prospective capital adequacy, for example for example via lower investment income. S&P reflects mounting investment exposures to high risk assets or material investment exposures to single sectors or counterparties in its risk position assessment.

European insurers have taken advantage of low interest rates to reduce their cost of capital and offset earnings pressure with lower coupon payments. S&P estimates that rated European insurers issued €16.9 billion in 2016, a slight decline from 2015. We expect issuance could stay quite high this year because, despite the prospect of gradually rising interest rates, regulatory developments could encourage more issues to support solvency capital requirements.

Many recent issues have been for refinancing and therefore have no impact on leverage. We expect that the bulk of issuance in 2017 will continue to be traditional instruments that typically qualify for Tier 2 capital under Solvency II or local equivalents.

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