Posted on Jan 31, 2012 by Sergio Ulloa
Ratings agency Standard & Poor's (S&P) has issued a series of cautions to major European insurers this week, warning them that ongoing exposure to the euro debt crisis has negatively affected their long term credit rating outlooks. The move follows S&P's decision to lower the ratings on nine eurozone member countries last month, and adds to the woes facing the continent's beleaguered insurance industry heading into 2012.
Standard and Poor's decision to place some of the Europe's top insurance companies on negative watch is but the latest in a series of actions made by worldwide rating agencies over the past few months
. Ratings agencies have become increasingly concerned about the future of the euro zone, owing to the massive debt and credit problems facing several member countries - notably Greece, Portugal, Ireland, Spain, and now Italy. The continent's sovereign debt problems have reached true crisis proportions in the past year, forcing drastic action from heads of state and comm-erce alike.
In separate company filings
, S&P announced that the long-term counterparty credit and insurer financial strength ratings for France-based life insurer CNP Assurances and Italian insurance giant Assicurazioni Generali had both been downgraded one level to 'A+' and 'A' respectively. The agency also lowered the ratings on Generali's various continental subsidiaries. Ceska Pojistovna was lowered to 'A-' from 'A', with Generali Holding Vienna and Generali Rueckversicherung both moving to 'BBB+' from 'A-'. Ireland-domiciled insurance groups Allianz and AXA's 'AA' ratings meanwhile were affirmed but have had their outlook now revised to negative. Another Irish based firm, Aviva, also had their credit rating affirmed at 'AA-' with a negative outlook. All ratings were removed by S&P from credit watch, where they had been placed with negative implications since December 9, 2011.
Fears about the state of the eurozone economy prompted the ratings agency's cautionary moves. S&P attributed most of the downgrades and negative outlooks to ongoing market adversity in Europe
, noting that the financial market developments at the end of 2011 have continued to put pressure on insurance companies' ability to maintain adequate capital levels. The agency said, "financial market developments and increased credit risk in the eurozone (in particular the recent downgrade of some eurozone sovereign issuers and the consequent downgrades of financial institutions) were key drivers in the downgrades."
S&P's decision to downgrade Generali and related core entities to 'A' from 'A+' was based on the group's reduced capital adequacy, which deteriorated from 'strong' to 'good' in the second half of 2011 according to the ratings agency. The Italian insurance group, left heavily exposed to its home country's sovereign debt issues
, still boasts "very strong earnings generation potential based on solid business fundamentals" but now faces increased risk capital requirements due to recent downgrades of eurozone sovereign issuers and their economies. S&P further noted that current volatile market conditions may weaken Generali's business and financial flexibility. "Generali's strong name recognition allowed it to refinance successfully all of its €3.5bn debt that matured over the past three years," S&P stated, "However, the group still has a significant amount (€2.25bn) of senior debt to refinance by 2014. Meanwhile, financial market conditions have reduced the availability and increased the cost of financing sources." Going forward, S&P suggest that Generali's sound business practices and operating earnings generation could improve this year and work to offset the insurer's weakened capitalisation and constrained financial position if they are able to improve their product distribution and profitability while maintaining strict underwriting discipline.
Regarding CNP in particular, S&P noted that financial market volatility had likely damaged the French life insurer's ability to maintain a strong capital position for at least the next two years, adding that "challenging economic and financial conditions could further prevent CNP from restoring its capital adequacy, despite strategic action." While the company has improved its business mix and will likely maintain its stable leadership position in France's life market going forward, S&P believe that persistently low interest rates will weigh on financial income and that sales of unit-linked products will suffer due to stock market volatility. In addition to this, high credit spreads and volatile equity markets all worked to limit CNP's earnings generation capacity last year. Despite an expected increase in contribution from non-European business lines, S&P do not anticipate these financial problems to subside for CNP in 2012. "This will further delay the restoration of the company's capital base, in our opinion, despite management actions to strengthen the company's solvency position," S&P stated.
Aviva's negative outlook meanwhile reflects S&P's concern that ongoing economic turmoil in Europe, combined with lethargic equity markets, could weaken the insurer's earnings generation capacity over the next few years. This could, in turn, further constrain the company's financial flexibility and ability to compete in the international insurance industry. While Aviva's earnings have remained strong, S&P notes that the company's exposure to the economic slowdown in the eurozone and across Europe may hamper growth. The group's life insurance business has already been affected, with life sales in Europe down 18 percent on the year. S&P further observed that if these risks cause Aviva's earnings to decline significantly relative to its expectations it could lower the company's AA- rating further over the next 12 to 24 months. This situation could also occur if Aviva's capital adequacy falls below the threshold S&P marks for A rated insurers, or if the Ireland-based company's financial leverage consistently exceeds 30 percent. Furthermore, S&P admitted they could revise Aviva's outlook upwards to stable if the group meets their earnings expectations or if their capital position improves, which would "provid[e] a greater buffer for any earnings weakness," the ratings agency said.
On Allianz's credit rating update, S&P noted as well that ongoing problems in the eurozone had "weakened Allianz group's risk-adjusted capital adequacy to a level close to our minimum expectations for the current rating." These risks could of course be exacerbated further pending future eurozone reforms and challenging stock market conditions. S&P also admitted that they might lower Allianz's financial strength ratings over the next year or two if their capital adequacy deteriorates further or if their earnings generation forecasts fall to a level that the rating agency considers below the A rating range.
For AXA, S&P reiterated the worry that "current investment market conditions and economic outlook may constrain Axa's abilities restore its capital adequacy." The French insurer was assigned a negative outlook and could also see its ratings lowered over the next 12 to 24 months if they are unable to reach S&P's earnings generation and retention threshold. However, S&P noted that AXA's revenue and earnings diversification, management actions, and risk management abilities will help strengthen the French insurer's capital adequacy in 2012 and 2013.
Europe's insurance markets face a multitude of problems going forward. The continent's sovereign debt crisis has occurred in conjunction with a soft pricing market and stubbornly low interest rates. These conjoined factors keep rates low and puts downward pressure on insurer profitability across most business lines. Attempts to increase premium levels have been met with resistance in a weak economic climate, with consumers unwilling to pay higher rates for insurance products, if indeed they can afford insurance at all. Added to all this is upcoming Solvency II regulations, which will require EU-based firms to taper their business ambitions and set aside greater capital reserves after the guidelines come into effect in 2015
Standard & Poor's (S&P) is a branch of publishing house McGraw-Hill. Now operating out of 20 countries, S&P provides the investment community with independent credit ratings on important financial instruments such as stocks, municipal bonds, corporate bonds and mutual funds. In addition to its risk management, investment research and credit rating services, Standard & Poor's is known for its indexes, in particular the S&P 500 index.
The Generali Group is a leader in global insurance and financial products market. Assicurazioni Generali, founded in 1831 in Trieste, is the Group's Parent and principal operating Company. In recent years, Generali has made a significant return to 14 European markets and has set up offices in the principal markets of the Far East, including China and India.
CNP is the leading personal insurer in France, with operations in the rest of Europe and in South America. CNP focuses on pensions, personal risk insurance and savings plans in the personal insurance market. They currently have over 22 million policyholders, 14 million of which are in France.
Allianz Group is one of the leading global services providers in insurance and asset management. With approximately 153,000 employees worldwide, the Allianz Group serves approximately 75 million customers in about 70 countries. On the insurance side, Allianz is the market leader in the German market and has a strong international presence.
Aviva is the fourth largest insurance company in Europe, with more than 300 years of experience in the global insurance industry, Aviva sell a broad range of insurance products including motor and property insurance, protection and health insurance, business insurance, life insurance, pensions and more.
Headquartered in Paris, the AXA Group companies are engaged in life insurance, health insurance and asset management services among others. AXA's operations are diverse geographically, with major operations in Europe, North America and the Asia-Pacific area.