Global multiline insurers' (GMIs) credit quality remains 'generally sound' according to S&P, but with negative rating action bubbling beneath the surface the firm expects pressure to mount on the world's largest insurers over the next two years.
According to an S&P industry report card, GMI's fundamentals remain reasonably sound despite a downward trend in credit quality over the past four years caused by ongoing economic and industry-specific challenges in the west, high natural catastrophe claims and volatile equity markets.
Whilst all its ratings for the sector remain in the lower 'AA' to upper 'A' range, only 10 of the 15 rated GMIs now carry stable outlooks. The remainder are either on negative outlook or CreditWatch negative as the rating agency anticipates a sectoral squeeze this year and next.
In particular, increasing credit risk in weakened European economies, low interest rates and difficult operating conditions have been eroding insurers' profits and threatening the adequacy of their capital bases.
GMIs global geographic and product diversification affords them an advantage over less diversified insurers. But risk-adjusted capital adequacy 'remains one of the main weaknesses to our ratings on the GMIs, along with financial flexibility, albeit to differing extents'.
However, whilst equity markets have picked up and credit spreads have narrowed slightly, GMIs have yet to take long-term measures to shift their capital to safer ground, says the report card. The persistently low interest rates have led GMIs to put more emphasis on pricing and reserving to secure stable underwriting earnings from their P&C portfolios, pointed out the rating agency.
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