European insurers and reinsurers are enjoying a period of relative economic stability, and in the past year have taken significant steps to improve their capital positions, de-risk investment portfolios and re-engineer products. However, given that no permanent solution has been established to solve the uncertainties in the Eurozone region, A.M. Best Co. has continued to stress the balance sheets of rated entities against a renewed deterioration of the investment markets. A.M. Best expects that companies should be braced for further economic shocks and should ensure risk management practices reflect the potential for volatile markets.
Since A.M. Best last updated the market on its stress tests on October 16, 2012, the economic situation in the Eurozone has become more stable and the financial markets less volatile, notwithstanding the recent market turbulence affecting various asset classes. In a new Best's Briefing titled, "European Insurers Better Placed, but Must Prepare for Further Economic Shocks", A.M. Best expects a period of stable ratings in the current environment. In the stress test, both the insurance and reinsurance segments exhibited strong risk-adjusted capitalisation. However, due to its lower financial leverage and lower exposure to investments in Greece, Ireland, Italy, Portugal and Spain (GIIPS), the reinsurance segment was seen to be more resilient and better positioned than the primary insurance segment to absorb any future economic shocks in the Eurozone.
Stefan Holzberger, managing director, analytics, said: "Insurers and reinsurers have taken a range of actions to prepare themselves in case of further market shocks and instability. Companies have been de- risking investment portfolios by diminishing exposure to peripheral sovereign debt and financial institutions.
Upon liquidating these positions, they have realigned portfolios toward highly rated corporate bonds, cash and short-duration securities."
Large players operating in several countries within the Eurozone have also realigned their government bond holdings to better match liabilities with local assets. Recently, many A.M. Best-rated insurers have been actively reshaping their portfolios and increasing the share of non-life business, thus reducing their dependency on investment performance and interest rates. Yvette Essen, director, industry research Europe and emerging markets, and author of the briefing, added: "Life insurers that have traditionally offered with-profits products continue to reshape their portfolios. The low interest rate environment is making it fundamental for them to actively re-engineer their products to reduce guarantees and lessen investment risk. A prolonged period of low interest rates remains among the biggest threats to life companies' balance sheets."
The briefing also notes that further risk mitigation strategies have been developed, with insurers and reinsurers having constructed a range of their own Euro-stress scenarios to develop adequate responses and be able to react promptly to significant shocks.
To access the full, complimentary briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=214450.
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
Copyright 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.
Contacts:
A.M. Best Company
Stefan Holzberger, +(44) 20 7397 0288
Managing Director, Analytics
stefan.holzberger@ambest.com
or
Yvette Essen, +(44) 20 7397 0322
Director, Industry Research
Europe & Emerging Markets
yvette.essen@ambest.com
or
Rachelle Morrow, +(1) 908 439 2200, ext. 5378
Senior Manager, Public Relations
rachelle.morrow@ambest.com
or
Jim Peavy, +(1) 908 439 2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com
