S&P Calls 2005 ‘a Good Year’ for European Insurers, Despite Losses

January 11, 2006

A report published by Standard & Poor’s Ratings Services, “Industry Report Card: European Insurance,” notes that “despite the large losses related to hurricanes Katrina, Rita, and Wilma, 2005 was a good year for the insurance sector in Europe.”

S&P said: “Excluding reinsurance, strong results were driven by peak-of-the-cycle underwriting profits and improved investment performance. 74 percent of insurance ratings in Europe, the Middle East, and Africa have a stable outlook, suggesting that much of the continued improvement expected in 2006 is already factored into ratings.”

S&P cautioned, however, that “insurance remains a cyclical business.” It expects 2005, and maybe 2006, to be the peak of the cycle. “Changes in financial reporting and regulation will be key issues to watch in 2006,” noted S&P credit analyst Hans Wright.

Discussing changes in accounting procedures, S&P said, “Although IFRS 4 will result in improved consistency in a number of areas, it is an unsatisfactory compromise. The Phase II IFRS standard cannot come soon enough, but is unlikely to be implemented before 2011. Meanwhile, supplementary European Embedded Value (EEV) disclosures are being introduced in 2005 accounts, thereby bringing a higher level of consistency to embedded-value reporting, on which Standard & Poor’s life analysis has been focused for many years. By 2011, EEV will likely be well established and will probably have evolved into “market-consistent” embedded value by that time.

“The Phase II standard risks becoming an irrelevance, however,” S&P continued, “if it does not fairly reflect the underlying economics of life insurance business. The Solvency II project is gaining more and more public recognition, as more members of the industry are becoming aware that the change toward the new prudential supervisory regime should not be a ‘big bang’ in faraway 2010, but requires immediate actions to tackle this extremely complex issue.”

S&P added: “Countries and companies exhibit varying degrees of readiness for Solvency II.” The rating agency said it “expects that leaders in adopting Solvency II principles may benefit from significant competitive advantages, while laggards risk having to give up their independence or even quit the market.”

“In our view, Solvency II will be a major driver for companies to review their business models,” Wright observed. “Ultimately, the competitiveness and performance of companies’ divisions will become more transparent for all stakeholders.”

S&P said it “believes that the increased transparency will help create a more efficient European insurance market, accompanied by significant polarization and consolidation processes, especially in the still more fragmented markets such as Germany and Spain. Many global groups have started their preparation for Solvency II, but have done so based on the potential competitive advantage rather than regulatory incentives.

“In countries such as the U.K., preparedness is high, since the U.K. Financial Services Authority has already implemented its vision of Solvency II, which is unlikely to be fully implemented in Europe before 2010. In less well-prepared countries, companies will need to respond proactively and quickly before Solvency II becomes a threat to their business.”

The report is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit research and analysis system, at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor’s public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.

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