French P/C Insurers’ Outlook Now Stable: Moody’s

January 31, 2012

In a new industry outlook published today, Moody’s Investors Service says that it has changed the outlook for the French property and casualty (P/C) sector to stable from negative, reflecting insurers’ smooth and successful management of the cycle.

However, Moody’s said its outlook for the French life insurance sector remains negative, reflecting continued pressures on life insurers’ profitability and the challenges in safeguarding solvency whilst preserving their products’ attractiveness in the context of elevated asset risk.

Moody’s said its current ratings on French P/C insurers and life insurers already incorporate the trends reflected in the outlooks.

In France, as in many European countries, economic growth will remain sluggish and unemployment rates will remain high, according to Moody’s. Although this does not have a direct material effect on the credit strength of insurance companies, this environment constrains both non-life and life insurance growth, as well as French households’ savings power, the ratings firm said.

In the P/C segment, Moody’s said that insurers will likely report better results for 2011 after two challenging years. Improvements mainly reflect price increases implemented since 2010, which have now fully come into effect. Although 2011 results may be flattered by a relatively low level of climatic events, the stable outlook for the P&C sector reflects Moody’s expectation that insurers will continue to increase their tariffs and maintain their underwriting discipline, which will stabilize results at satisfactory levels.

In the life segment, 2011 compared unfavorably with 2010, with a significant decrease in savings inflows. Moody’s said it believes that 2012 will be a difficult year for French life insurance, due to the ongoing elevated level of competition between insurers and banks and a continued decrease in credited returns, which reduces the attractiveness of insurance products. Beyond 2012, Moody’s believes that the reduced attractiveness of life products will likely be a long-term feature of this market.

Lower revenues have had only a partially negative effect on insurers’ profitability at this stage. However, lower recurring investment returns will also exert pressure on profitability, as will expected higher impairments. In the long term, Moody’s said that the reduced attractiveness of life insurance savings will prompt insurers to shift their focus away from pure asset accumulation products, towards strengthening their competitive dynamics in “classic” insurance risks.

However, the rating agency said that the current macro-environment is not conducive to generating alternative revenues and earnings. For example, increased taxes and the current economic crisis make some potential growth products less affordable (e.g., health products), while reforms necessary for the promotion of other products (e.g., long-term care) have been delayed.

The increase in outflows reported in 2011 by life players also partly represents a structural shift, but in Moody’s view, it does not threaten French insurers’ liquidity at this stage. However, as insurers continue to suffer from asset-quality deterioration — with the potential for investment losses — they could opt to share some of these losses with policyholders. Moody’s said it believes that the main short-term challenge for the life sector is to strike a balance between safeguarding solvency and preserving attractiveness for their products. The industry currently has various resources at its disposal, but the leeway for manoeuvre is reducing.

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