A.M. Best has issued a warning in its newest briefing regarding “pressure points” building in Europe that could potentially affect insurers and reinsurers’ balance sheets.
Quantitative easing and weak economic growth across the EU in particular have unsettled the ratings agency, while foreign exchange developments, tensions with Russia, anti-austerity measures in Greece and separatist movements in Spain have also been cited as causes for concern.
The European Central Bank (ECB) unveiled a large-scale sovereign bond buying programme on 22 January 2015 in an effort to combat stagnation and ultralow inflation in the eurozone.
The ECB will begin its stimulus programme in March 2015 and buy $70 billion of public- and private-sector assets each month until September 2016.
It is hoped that additional liquidity will spur an increase in credit to the real economy, maintain historically low interest rates and help to bring the inflation rate back toward the ECB’s target of just below 2 percent. Inflation is estimated to have been -0.6 percent in January for the eurozone area.
On the back of the ECB’s quantitative easing announcement, the euro declined 2.2 percent to an exchange rate of €1.14 to the US dollar, down 17 percent year-over-year.
The Swiss franc has also seen considerable volatility, according to A.M Best, initially climbing following the Swiss National Bank’s surprise decision on 15 January 2015 to remove its Swiss franc 1.20 cap versus the euro.
Most European insurers and reinsurers currently match their assets and liabilities. As a result, A.M. Best has stated that it does not expect a material move in rated entities’ credit quality.
In terms of reporting consolidated results for insurance groups headquartered in the EU that have business outside the eurozone, A.M Best has claimed that they may actually benefit from the euro’s decline.
The agency claimed that they could see improved revenues and earnings as they convert stronger currencies (eg, US dollars or GBP) to the euro for financial reporting purposes.
The briefing states: “A.M. Best does not expect a weakened euro to affect revenues for non-life insurers substantially, as the demand for general insurance products is unlikely to change in a meaningful way.”
“The financial health and spending power of policyholders will continue to drive insurance buying decisions. Low currency values in the Eurozone could make exports from these countries more attractive, and as increased exports contribute to growing businesses, insurance revenues may benefit.”
In 2011 and 2012, A.M. Best conducted specific tests to stress the balance sheets of insurers for a possible further deterioration in the investment environment in Europe.
The agency took negative rating actions on several European insurers, with downgrades attributed primarily to companies’ exposure to Italian and Spanish sovereign debt and Eurozone financial institutions.
Despite A.M. Best’s feeling that Solvency II will continue to add to the expense ratios of insurers and reinsurers operating in a soft market, it has stated that the general rating environment remains stable.
The agency claimed that insurers within its ratings framework are “well prepared” for the new regulatory regime, and current market conditions are “unlikely” to lead to an increased number of downgrades or negative rating outlooks across the EU.
