"Economic growth in Europe remains slow and fragile with a number of risk potentially raising market volatility, as it has been the case with the UK's referendum vote to leave the EU. While concerns about Greece leaving the euro area have receded, it also remains a downside risk", said Helena Kingsley-Tomkins, Moody's Assistant Vice President Analyst.
"Furthermore we maintain a negative outlook on the UK life sector to reflect the risk arising as a result of the UK's decision to leave the EU".
Moody's notes that the slow and fragile economic growth, particularly in Europe, together with persistently low interest rates continue to pressure insurers' earnings. Based on Moody's analysis, the European sector's return on equity, whilst improved since the 2008 financial crisis, remains far below the 2007 level and is only just covering the industry's cost of equity.
Furthermore, the agency's expectation of gradually declining reserve releases is set to lower underwriting profitability for European property & casualty insurers.
As the macro-economic environment remains unfavourable, insurers are finding ways to adapt, with mixed credit implications. This includes on-going, albeit modest, changes to the asset mix in the search for yield, a shift towards lower investment grade credit risk and a focus on cost reductions rather than top line growth.
"Following the UK's EU referendum "leave" vote, we believe there is an elevated risk of capital, growth and profit deterioration", added Ms Kingsley-Tomkins. According to the rating agency, the most affected insurance groups are UK domestic life insurers as a result of (i) their high asset leverage; (ii) their significant exposure to UK investments (given their policy to match sterling-denominated liabilities with sterling-denominated assets); and (iii) the discretionary nature of some life insurance products, whose sales are correlated to the economic cycle.
The report "UK Life Insurance: Outlook Remains Negative" is part of Moody's bi-annual EMEA insurance Monitor, which highlights the rating agency's views on recent topics facing the industry. Other reports in this edition include:
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Reserve Releases set to diminish gradually, lowering underwriting performance
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Negative rates for German government bonds heighten pressure on German life insurers
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Moody's poll says a low growth is single greatest threat to insurers over the next 5 years
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Impact of interest rates fall on UK Life insurers' solvency II ratios expected to be cushioned by recalculation of Transitionals
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As technology transforms the ladscape, innovative insurers have competitive edge
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GCC: CFOs optimistic on profitability despite competition and stronger regulation
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Qatar's new insurance instructions are credit positive
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