General Insurance Article - European insurance stable but report shows growing risks

Moody's Investors Service has kept its outlook on the European insurance industry at stable as still solid economic growth supports insurance sales and interest rates will likely rise gradually.

 Nonetheless, the prospect of more M&A and continued changes in asset mix create risks for the sector. The report, "Insurance -- Europe: 2019 outlook remains stable as solid economic growth, increasing rates offset rising M&A and asset risks," is now available.

 The research is an update to the markets and does not constitute a rating action. In the Euro area, growth will remain robust although less heady than in 2018, at around 1.8% in 2019, compared with an expected 2% in 2018. This will help drive growth in property and casualty (P&C) premiums.

 Moody's also expects P&C insurers to remain disciplined in their underwriting, but tough competition in most markets will curb their ability to raise prices and offset increase in claims. This will lead to some deterioration in combined ratios in most markets. Moody's expects interest rates to rise gradually. Pressures on P&C insurers' investment returns will therefore gradually ease, even if investment returns will still decline in 2019.

 However, life insurers, which hold assets with a longer duration than P&C insurers, will face prolonged pressures on investment results. Most life insurers are able to adapt and protect their margins, but some life insurers, notably in Germany, still face solvency pressures.

 "The profitability of the European insurance sector is increasingly pressured by non-insurers, such as asset managers in the life segment, or technology firms and reinsurers in the P&C segment. As a response, insurers alter their business model and pursue growth opportunities, which will drive an increase in M&A activity, with cross-sector M&A becoming more frequent," said Benjamin Serra, a Senior Vice President at Moody's.

 M&A typically reduces capital, increases leverage, and creates execution risk for insurers. Closed book transactions are also rising according to Moody's. The rating agency also highlights that European insurers will continue to increase their investments in illiquid assets and in lower quality assets while at the same time non-financial corporate leverage is rising and debt covenants are weakening, signaling late-cycle risks.

 Asset risk is therefore growing for European insurers which are not all yet equipped to deal with a deterioration in the credit quality of illiquid assets. A hard Brexit and further deterioration in the credit quality of the Italian sovereign are the two key downside risks to Moody's stable outlook for the sector. The rating agency's base case is that a Brexit agreement is likely to be reached after fraught negotiations but the risks of a "no-deal" scenario are significant. 

 Moody's Insurance-Europe report

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