S&P predicts ‘stable to gradual increases’ in European run-off market

S&P has predicted “stable to gradually increasing activity” in the European property casualty run-off market in a report.

Analysts at the ratings agency expect run-off liabilities to grow annually by 1 percent to 2 percent until 2020, especially for long-tail lines, as portfolios are identified as “no longer profitable enough” or “ill-suited” for the market.

But the agency said it believed this trend would not affect the creditworthiness of its rated companies.

In its report ‘‘Grow Or Go? The prospects for Europe's insurance run-off market', S&P said it expected continued activity in the life run-off market, especially in the UK and Germany, but to a lesser extent than in the last three years.

The UK, which has the largest life insurance market by gross written premiums in Europe, saw consolidation start in the 1980s. But S&P said it expected “further scope for run-offs, inparticular in the annuity and with-profit sector”. The report explained that this will be driven by an increased focus on risk and asset-liability management since the introduction of Solvency II; low interest rates, which led Aegon to sell its UK annuity portfolio and L&G to sell its Mature Savings business to Swiss Re; shifts in business strategy, for example at Standard Life and others focused on building asset management capabilities; and Brexit uncertainty.

“We expect the number of companies willing to take on management of complex types of business like annuities and with profits will decrease leading to continued consolidation in this sector.”

The agency expected “further consolidation” in the German market, which will reduce the number of legal entities, which has already resulted in a decline to 84 in 2017 from 95 in 2010. It suggested that three consolidators could establish a reasonable market position in the German life market: Viridium Group; Athora Group; and Frankfurter Leben.

“Run-off platforms typically benefit from economies of scale, synergies, and in-depth expertise. While run-off is not new to the market, the emergence of dedicated business models backed by various investors for run-off is relatively new to the German life market, bringing a new dynamic,” the report said.

Analysts said there is “low potential” for run-off activity in Italy and France because of “relatively limited solvency benefits resulting from low guarantees and the small share of long-tail life products”.

The report said: “Run-off related rating actions depend on the specifics and magnitude of the business but we do expect less transformative run-off deals in the next two years.

“The main reasons for run-off deals in the next few years, we believe, will continue to be regulatory changes and requirements, capital optimisation, and the need to improve risk-return profiles amid still-low interest rates.”

It said that the main risks for insurers depend on the type of transaction. “We believe an external run-off could lead to reputational risks, while an internal run-off could keep volatility on the balance sheet and capital locked up for the long term.”