European re/insurers are well positioned to withstand the current volatility in the stock markets, having made significant changes to their investment portfolios since the global financial crisis of 2008, as well as the subsequent European sovereign debt crisis in late 2011 to 2012, according to a briefing published by A.M. Best.
Not only has there been a notable shift from shares to high-quality fixed income assets, but the majority of the large European re)insurers are currently extremely well capitalized, explained the briefing titled, “European Insurers and Reinsurers Withstand Stock Market Volatility but Investment Options Limited.”
Re/insurers are also well aware of the speed at which liquidity can freeze up and how contagion effects can spread to both real estate and equities, the report noted.
“Typically, most of A.M. Best’s highest rated European large insurance groups have a buffer of 20 percent to 30 percent in their investment portfolios to withstand market value fluctuations without incurring negative pressure to their current ratings,” said Carlos Wong-Fupuy, senior director, analytics. “In some instances, entities rated by A.M. Best could endure even greater asset depreciations.”
The European re/insurance companies rated by A.M. Best have no significant direct investments in China, the report noted. However, the ratings agency expressed concerned about the contagion effect of China’s slowing growth on the global economy and market volatility, highlighted by “Black Monday” on August 24, when Shanghai Composite Index tumbled by 8.5 percent.
“The significant declines seen in global equity markets in the past few months, and the drop in commodity prices, come at a time when European re/insurers have started to move assets back into stocks and real estate,” A.M. Best said.
While investment portfolios remain largely concentrated on fixed income instruments, the low interest rate environment has led companies to search for yield by shifting into real assets such as infrastructure projects, equities and real estate, the report continued.
Yvette Essen, director, research & communications – EMEA, and author of the briefing added: “If there are worries about a slowdown in global economies, options for insurers to try to increase their investment returns will become more limited.”
Source: A.M. Best
Topics Carriers Europe Reinsurance AM Best
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