FPXE - European Insurers Show Resilience In Volatility

2023-06-28 00:30:00 ET

Summary

• We believe the insurance industry offers stable credit fundamentals in contrast to the broader, more turbulent, financial sector.
• U.K. and European insurers underwrite an estimated €1.8 trillion in gross written premium on an annual basis.
• During fiscal 2022, these insurers delivered record profitability and demonstrated strong underwriting discipline. The first quarter of 2023 continued this trend despite continued market volatility.

By Shanti Kang

We believe the insurance industry offers stable credit fundamentals in contrast to the broader, more turbulent, financial sector.

U.K. and European insurers underwrite an estimated €1.8 trillion in gross written premium on an annual basis, and are dominated by a pool of competitive players in the U.K., France, Germany, Switzerland, Italy and the Netherlands.

During fiscal 2022, these insurers delivered record profitability and demonstrated strong underwriting discipline. The first quarter of 2023 continued this trend despite continued market volatility.

National insurance “champions” benefited from diversified product offerings, broad geographic footprints and multichannel distribution, which contributed to resilient profit streams.

Consistent operating capital generation and low-cost funding, enabled by low interest rates, led insurers to build significant capital buffers and write higher business volumes, with 2022 Solvency II Solvency Capital Requirement ratios (SII SCR) sitting at exceptionally high levels - above 200%, on average.*

In first quarter results, solvency capital experienced only minor declines, with insurers remaining well capitalized above their own risk appetite ranges and significantly exceeding minimum technical solvency requirements. As a result, we expect continued capital resiliency this year.

Compared to banks, insurers hold an advantageous position when it comes to liquidity risk. The presence of high exit barriers, reinforced by covenants and tax relief crystallization upon redemption, discourage policyholder surrenders. Top insurers have relatively low surrender rates for savings products.

We see higher lapse risk frequency in niche wealth management and “bancassurance” channels catering to sophisticated policyholders searching for higher yield. Large insurers possess adequate liquidity to manage lapse risk, enabling them to retain business with attractive guaranteed rates and sufficiently cover redemptions.

Due to the structure of liabilities, insurers need not liquidate assets as quickly as banks. This reduces the likelihood of mark-to-market values being realized at a loss. Investments consist mainly of high-quality fixed income securities matched to liabilities based on duration, while equities, mortgage loans and real estate are limited in exposure.

First-quarter results showed modest loan-to-value ratios, and showcased property held in prime locations. We expect higher devaluation risk on real estate in 2023 as property valuations weaken with rising interest rates. However, in our view, insurers’ strong capital buffers should withstand any markdowns.

Insurers defend against large loss-year impacts by booking reserves above actuarial best estimates. Consistent reserve releases, seen at prudent European insurers, are credit-positive, offering capital to be redeployed from benign loss years when needed.

Overall, we view monoline property and casualty players cautiously and prefer large, diversified names. The multiple levers detailed above, coupled with resilient profitability, support our view that insurance credit fundamentals should provide stability in an uncertain environment.

* Excludes insurers under the Swiss FINMA regime.

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