Credit Conditions For EMEA Insurers

Key Takeaways

• The European insurance sector is mostly back to the previous status quo, that is, the lower-for-longer interest rate environment. In some markets, vehicle traffic is still below historical levels, benefitting motor insurers with lower frequency claims.
• Flooding events and wildfires in Europe have come at great human and economic cost; the insured loss appears manageable for rated non-life insurers in those regions.
• Despite rate increases in the reinsurance sector in 2021, challenges remain for those reinsurers with exposure to flooding events in Europe, China, and, in the U.S., California wildfires and a busy start to the U.S. hurricane season. 2021 may become an active claims year for reinsurers.

Key risks

• Pandemic-related volatility in the capital markets and subsequent investment losses.
• Increasing downgrades of corporate bonds, and rising capital requirements as a result.
• Low interest rates, which mainly hurt life insurers with legacy investment guarantees in their back books.
• Rising claims volatility, potentially outpacing rate increases for reinsurers.

Table 1

Key developments

First-half 2021 results evidenced comfortable operating earnings for European non-life insurers, while life insurers continue to suffer low interest rates. While flooding events in some European regions represent an earnings event for non-life insurers, we don't expect a ratings impact. Our rated non-life primary insurers generally have advanced reinsurance programs in place. Tailwinds from a lower number of motor frequency claims should fade over time as traffic trends back to normal. European life insurers continue to promote capital-light products, cutting costs, searching for yield pickup to cover guarantees in legacy back books, and taking opportunities to offload them by sale or reinsurance.

European insurers are well placed to weather potential capital market volatility as capital surpluses recover. Even during the height of the COVID-19 crisis, European insurers' ratings proved resilient against external shocks, and the sector kept its average rating in the 'A' range. Capitalization and diversification are key strengths for European insurers.

Reinsurers are facing an active natural catastrophe year. Losses so far this year indicate that 2021 could potentially be another expensive natural catastrophe loss year for the reinsurance industry. In Europe, the floods in July were a significant loss event, followed by Hurricane Ida in August, while insured natural catastrophe losses in the first half of the year have been the second highest on record. The global reinsurance sector in 2017-2020 didn't earn its cost of capital due to COVID-19-related losses, large natural catastrophe losses, adverse loss trends in certain casualty lines, and fierce competition among reinsurers exacerbated by alternative capital. As a result, our sector view of the global property/casualty reinsurance sector remains negative. At the same time, we expect the firming rate environment will continue in the upcoming P/C renewal season in 2022.

Chart 1

Rating Actions: May 2021-October 2021

Component subscores for all rated EMEA insurers were published on Oct. 11, 2021 (see "EMEA Insurers Ratings List: Financial Strength Ratings And Scores").

Movements in ratings, outlooks, and scores for major EMEA insurers in the past six months have continued the upward trend of prior periods (see "EMEA Insurance Monitor: May 2021," published May 4, 2021, and "EMEA Insurance Monitor: November 2020," published Nov. 6, 2021). Of the 56 large rated insurers we list below, we saw 12 positive movements in scores, ratings, or outlooks, and only two negative movements. Of the 14, six were upgrades. We revised three outlooks to positive and one to stable. Two further rating changes followed acquisitions, while we also revised subscores of KLP and Reso-Garantia without affecting the overall ratings.

We have removed RSA Insurance Group PLC (RSA) from our list of top insurers as we withdrew our ratings on it at the issuer's request on Aug. 20, 2021. At the time of the withdrawal, our outlook on RSA was stable.

Main causes of rating and score movements

The upgrades of Helvetia, Gothaer, and Ingosstrakh reflected their strong and resilient performance despite capital market volatility due to the pandemic, while the upgrade of CNP was due to reduced uncertainty around its capital buffer. The improved creditworthiness of Bank Otkritie Financial Corp. led to an upgrade for its subsidiary Rosgosstrakh, while an upgrade of Gulf followed an improvement in its capital position.

Mergers and acquisitions were a notable source of outlook and score changes. We placed our ratings on Cattolica on CreditWatch positive following Assicurazioni Generali's offer to acquire the company, and revised several scores on Covea on its plans to buy PartnerRe.

The outlook revision to stable from negative for KBC Insurance mirrors the same action on its parent, KBC Group. We downgraded Aviva's French subsidiaries Aviva Vie And Aviva Assurances following their sale to Aema Groupe, but affirmed our other ratings on the Aviva group.

Our other rating actions in the past six months were for more idiosyncratic reasons.

Ratings in the tables below are correct as of Oct. 28, 2021.

Table 2

Insurance Ratings Outlook Distribution In EMEA

Charts 2 and 3 show the outlooks on our insurer financial strength ratings in Europe, the Middle East, and Africa as of Oct. 28, 2021.

Looking at the breakdown of the outlooks, 83% were stable, 9% negative, 5% positive, and 2% were on CreditWatch. The high proportion of stable outlooks endures, and there has been a marginal decline in the number of negative outlooks over the past year. In October 2020, 11% of outlooks were negative, versus 12% in April 2021.

More than half of the negative outlooks relate to the poor operating performance of protection and indemnity clubs in Western Europe. We see a higher proportion of positive outlooks in Central and Eastern Europe. There has also been an increase in positive outlooks on companies in the Middle East and Africa, most of them reflecting improved earnings or positive developments in company-specific issues.

Chart 2

Chart 3

Selected Research