S&P Report Finds French Market is ‘Stable’

June 18, 2003

A report on the French insurance market released by Standard & Poor’s Ratings Services calls the outlook in both the life and P/C sectors “stable.” S&P had previously classed the P/C sector’s outlook as “negative.”

According the report, “French Insurance Market Portfolio Review and Outlook”, which is available on RatingsDirect, S&P’s Web-based credit analysis system, at: www.ratingsdirect.com, the stable outlook is “based on the strong credit quality in both the life and property/casualty sectors, as reflected in strong capitalization and financial flexibility, and improving underwriting discipline among property/casualty insurers.”

S&P indicated:”These strengths are offset by the struggle to establish sustainable profitability among some property/casualty insurers, and, in the life sector, the challenge of reducing policyholder remuneration to offset the poor investment environment.”

S&P credit analyst Emmanuelle Cales, one of the report’s authors, observed: “The outlook revision on the property/casualty sector reflects improved rating discipline and risk selection across all property/casualty lines, and sound solvency levels.” She indicated, however, that these positive factors were offset by a lack of established pricing discipline in a market that is one of the most competitive in Western Europe, and continuing adverse investment conditions that are likely to affect the bottom lines and capital bases of some players.

S&P said it “believes that the current erosion of reinsurers’ financial strength ratings does not represent a systemic threat to domestic property/casualty insurers, or the French insurance market as a whole.”

As far as the life sector is concerned S&P said that its stable outlook is based on “the resilient business positions of local players, their strong solvency, and the positive long-term growth prospects in pensions. Offsetting these strengths is pressure on investment and expense margins, given currently low interest rates and depressed equity markets.

“Despite a recent slowdown in the growth of new business after a buoyant period in 1999 and 2000, the French life market consistently ranks among the world’s five-largest domestic markets, and is expected to continue to do so in the long run based on a sustainable demand for long-term savings. The current favorable tax treatment for life insurance policyholders is therefore crucial to new business growth in the life industry. Guaranteed rate policies have been closed to new business since the early 1990s; these obligations have subsequently been diluted by spectacular premium inflow from policies that do not carry guaranteed rates.

“With bonuses paid to policyholders being determined after year-end, French life insurers have flexibility to adapt to lower investment results, as evidenced by a further 50-70 basis point reduction in bonuses announced at the beginning of 2003 for funds managed in 2002. Bonuses are a key variable of adjustment, because the industry must adapt to the currently poor investment environment; releases from the unallocated policyholders’ bonus reserve (PPE) or the realization of capital gains on the bond book–as often seen in 2002—are only short-term measures.”

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