Global, diversified insurers are best positioned to withstand the industry’s top economic and competitive challenges, according to a report published by Standard & Poor’s Global Ratings.
Geographic and product diversification help global multiline insurers (GMIs) cope with challenges such as prolonged low interest rates, the looming risk of the U.K. exiting the EU and increased regulatory scrutiny, said the S&P report titled “Global Multiline Insurers’ Diversification Remains A Key Strength Amid Prolonged Low Interest Rates.”
“GMIs’ capital positions and operating performance held up well on average last year,” said S&P Global Ratings analyst Volker Kudszus.
“And, given our stable outlooks on nine of the 13 players we rate, we expect our ratings on GMIs will generally remain more resilient than on our universe of insurance ratings, where negative outlooks slightly outweigh positives,” he added.
“Overall, global diversification is a double-edged sword, though,” Kudszus said. “While no single external challenge is likely to trigger downgrades of GMIs currently, most have at least some exposure to many kinds of challenges.”
GMIs are not immune to claims, reserving trends or major claims events and challenging investment markets, but are set to better cope with these challenges, the report said.
Capital Adequacy
The average capital adequacy of the 13 GMIs S&P rates has not weakened materially during 2015 or the first quarter of 2016. As a result, the ratings agency expects these companies on average will maintain capital adequacy in line with a ‘AA’ rating level this year.
In addition to geographic and product diversification, S&P said capital adequacy remains a key strength for GMIs. “This compares to a global insurance sector average capital adequacy commensurate with our ‘A’ rating level and an ‘A-‘ average rating.”
Risks of Potential ‘Brexit’
S&P pointed to looming risk of next month’s referendum in the U.K., when the public will decide whether to stay or leave the EU.
“While we think Britain will vote to stay, in its referendum on June 23…, the possibility of a ‘Brexit’ certainly remains a risk for insurers with exposure to the U.K. and EU,” said S&P in its report.
“We believe a Brexit would likely result in additional costs for insurers, but not a curtailment of doing business in Europe,” the report added.
In general, GMIs are “better positioned than less diversified competitors to withstand any economic and financial challenges [Brexit] would present in the short to medium term,” S&P said.
Indeed, the report noted that global diversification could help U.K. domiciled GMIs in the event of a Brexit because they are less reliant on a single market than less diversified companies.
Increased Regulatory Scrutiny
While diversification has placed GMIs under increased regulatory scrutiny, their “multidimensional capabilities allow more nimbleness than more focused writers,” said the S&P report.
As an example, S&P cited the Globally Systemically Important Insurers (G-SII) regulation, which aims to limit systemic risk from insurers that are too big to fail.
“While the regulation currently does not set higher hurdles for G-GIIs, it introduces some uncertainties in the long run, since it creates an unlevel playing field with possible advantages for non-G-SII competitors.”
S&P did not believe this will have any short-term impact on GMI ratings because the G-SII regulation applied lower capital charges for most risks than S&P’s risk-based insurance capital model.
“[W]hile a myriad of regulatory changes might disproportionally affect GMIs, given their global footprint, so far none has been substantial enough to trigger downgrades,” said the report.
Company Specific Challenges
The report said some GMIs face company specific challenges, citing the examples of AIG and Zurich, among other GMIs.
As a group on top of the G-SII list, AIG earlier this year faced pressure from investor activist Carl Icahn to break up the group. In addition, the company booked a $4 billion pretax reserve charge during the first quarter of 2016, which was higher than S&P’s base-case assumptions.
S&P said AIG’s reserve charge and its significant capital returns to shareholders of $25 billion by 2017 led AIG’s capital adequacy to fall to the ‘AA’ level from the previous ‘AAA’ levels. In addition, S&P has revised its outlook on AIG’s holding company to negative from stable.
Another company mentioned in the report, which faced some challenges in 2015, was Zurich, which reported a “material drop in non-life insurance profitability” in 2015, driven in part by the claims from the Tianjin port explosions and reserve strengthening in its U.S. motor book. (These losses led to CEO Martin Senn’s resignation from the company and other executive leadership changes.)
S&P said its assessment of Zurich’s capital adequacy has remained unchanged at the ‘AA’ level.
GMIs Defined
S&P defined GMIs as “globally diverse primary insurance group that display some diversification by lines of business.”
This group includes highly diversified companies such as AIG, Allianz SE, Aviva, AXA and Zurich Insurance Co., S&P said.
The group also includes “life-biased groups like Aegon, Met Life, Prudential Financial (U.S.), and Prudential Plc (UK),” as well as non-life insurance-biased groups such as Chubb (formerly ACE), QBE, Tokio Marine and XL.
Source: Standard & Poor’s