Standard & Poor's Ratings Services believes the credit quality of global multiline insurers(GMIs) it rates is still generally sound. The rating agency comments "This is despite a downward trend we've observed over the past four years amid ongoing economic and industry challenges in Europe and the US, high natural catastrophe claims, and volatile equity markets. According to our criteria, the GMIs still show sound credit characteristics that compare favourably with those of large corporate or financial institutions.
Our ratings in the sector therefore remain in the lower 'AA' to upper 'A' range. Several carry negative outlooks, however, as we anticipate mounting pressure on the GMIs over 2013 and 2014. In particular, increasing credit risk in weakened economies, low interest rates, and difficult operating conditions have been eroding insurers' profits, threatening the adequacy of their capital bases. In our view, the preservation of capital has therefore become the top priority for many GMIs.
Risk-adjusted capital adequacy remains one of the main weaknesses to our ratings on the GMIs, along with financial flexibility, albeit to differing extents. And these challenges will likely lead to less tight capital management than in the past. We believe operating performance and diversity will be key to alleviating pressure on the groups' financial profiles. The strength of their competitive positions should afford them the pricing power and ability to adjust their product offerings to the difficult investment markets.
In 2011 and 2012, many GMIs reported high regulatory solvency ratios. However, this resulted largely from unrealized capital gains on life insurance bond investments, which understate the risk of continually low interest rates stifling investment earnings. Many GMIs' capital structures include high amounts of soft capital, such as the present value of future profits (PVFP) on inforce policies.
Equity markets have picked up and credit spreads have narrowed slightly, but the GMIs are in our view yet to take long-term measures to shift their capital to safer ground. Some seem to have reined in their appetites for capital-intensive life insurance business however, while others are increasing their focus on property/casualty (P/C) through higher rates and volumes, and cost-efficiency programs.
Our ratings on 10 of the 15 GMIs we rate carry stable outlooks, four have negative outlooks, and one rating is on CreditWatch negative.
We've taken several negative rating actions over the past six months. In June 2012, we placed our ratings on Italian GMI Generali on CreditWatch negative, mostly because of uncertainty on the group's strategy and concerns about the group's higher exposure than peers' to the Italian economy. We revised three outlooks to negative from stable: that on AIG's holding company because of relatively weak fixed-charge coverage for the rating; on Prudential, mainly to reflect the risk of capital adequacy weakening due to low interest rates, higher capital requirements, and potential risks to the group's strength in the UK; and on Australian insurer QBE because we believed that, contrary to our previous expectation, QBE's capital would remain deficient at the 'A' rating category at the end of 2012 according to our model.
There were two downgrades. Last August, we lowered our ratings on Aviva to 'A+' from 'AA-' due to our view of significant risks and costs associated with Aviva's strategic plan. More recently, in December, we lowered the financial strength rating on AXA group to 'A+' from 'AA-' reflecting our view of the continuous relative weakness of capital adequacy, despite recent improvements.
The sole positive rating action was the revision of our outlook on XLIT to positive in December after the group had deleveraged and strengthened its franchise.
Since the last report card, we have added three GMIs to the peer group:
♦ MetLife, the largest life insurance company in the US, which has substantial operations in Japan;
♦ Tokio Marine, Japan's largest insurer, which has a meaningful amount of business in the US; and
♦ Prudential, one of the largest players in the UK market, with a significant presence in the US and Asia."
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