European insurers’ 2009 earnings show improvement, concerns remain

The preliminary or final results of the major insurance groups in Europe for 2009 have, in most cases, recovered from the significant losses recorded in 2008, aided in part by an improved performance in investment markets. However, companies' figures for 2009 were still below the high earnings levels reported in 2007 and 2006.
Indeed, in the medium term, the impact on profitability and revenues as a result of the global financial crisis, continued weak economic growth and regulatory constraints will limit a return to the previously high earnings levels, Moody's Investors Service said in a special comment.
"Moody's noted signs of continued recovery in the investment markets throughout 2009, hence the large unrealised losses in 2008 are not a recurring feature for European insurers. Nonetheless, the improved performance in equity markets is largely mitigated by most insurers having de-risked from equities," said Paul Oates, author of the report.
Recessionary forces contributed to the reduction in consumer and corporate insurance expenditure, negatively impacting European insurers' revenues. Moreover, muted economic growth and high government borrowing levels will likely continue to depress revenues and investment returns. However, Moody's observed that core profitability stabilised in 2009, "but the rating agency also noted concerns about non-life profitability, with non-life combined ratios (i.e. the net loss ratio and net expense ratio) rising as rate increases barely cover claims inflation," added Oates.
Moody's also observed improvements in European insurers' regulatory solvency and shareholders' equity in 2009, whilst economic capital has shown significant improvement, largely driven by de-risking activities.
However, Moody's highlighted that regulatory concerns remain for 2010 and 2011, as there is considerable uncertainty over the final form of Solvency II which details the regulatory requirements for insurance firms that operate in the European Union.
Moody's also cautions that core earnings remain depressed, therefore the capital levels and fixed charge and interest coverage ratios of some rated European insurers remain below long-term rating expectations.
However, in terms of rating activity, Moody's rating actions on European insurers have been limited during the first quarter of 2010: Prudential Plc's A2 senior debt rating was affirmed and the negative outlook maintained following the announcement of its proposed USD 35 bln acquisition of AIG's Asia operations, and Swiss Re's A1 insurer financial strength rating was affirmed with the outlook revised to stable from negative following de-risking of its legacy portfolios.