European Insurance: Key Credit IssuesPetr Vins, Branch Manager, CEE          June, 2012
Agenda» Moody‘s European Insurance Ratings in Context  1. Recent Rating Actions» Key Credit Issues  1. Investment Exposure...
Moody’s European Insurance Ratings in Context                                                                    Upgrades ...
Sovereign Rating Actions in February 20121.    Downgrades concentrated among weaker nations     – Slovenia, Slovakia (A2, ...
Regional Rating Trends: Negative in Europe, Positive in Latin America                                                     ...
Moody’s Sovereign ratings in CEE – how we got here ?             Rating History*                               Current   8...
A “New Normal” For CEE                                                                CEE Key Debt Metrics                ...
Insurance Rating Actions in February 2012 (1/2)1.    Significant operating and investment exposure to Italy and Spain     ...
Insurance Rating Actions in February 2012 (2/2)           Euro Area Exposures Differ, but Downside Risks Increase for all ...
Banking Rating Actions in February 2012  Impacted European Banking Groups By Country                                  Aust...
CEE7 banking systems asset-weighted average ratings          Standalone Rating (BCA)   Parental / Coop Support   Systemic ...
European Insurance Ratings vs. Banks                                                                                      ...
What Can Further Pressurise EMEA Insurance Ratings» Significant risks remain  – Double dip recession in Europe  – Persiste...
Eurozone Risk: The Market is Trading at a GAP with Moody’s Ratings                            Median Insurance Sector CDS-...
1. Eurozone Sovereign: The impact of Italy and Spain is starting to be felt   Investments Mix of Rated European Insurers –...
1. Eurozone Sovereign: Greece, Ireland and Portugal have Little Direct   Impact on European Insurers    Impact of a defaul...
1. Eurozone Sovereign: Life Customers Share The Pain  Gross Exposure to Peripheral European                               ...
1. Eurozone Banks: a Second Order Impact    Investments Mix of Rated European Insurers –                                  ...
1. Eurozone Banks: a Second Order Impact                                    Geographical Split of Banking Exposure –      ...
20      2. Insurance Profitability: Halved since 2007          Reducing Profitability for European Insurers1 …            ...
21  2. Insurance Profitability: Challenging Fundamentals, Particularly in LifeImpact of Economic Environment on…Overall Pr...
22  2. Insurance Profitability: Goodwill and Other Intangibles Impairments» Goodwill impairments related to life insurance...
2. Stagnant Growth To Depress Sales of Life Products» Short-term growth in euro area revised down significantly» Mild rece...
2. Life Insurance Profitability: A Low Interest Rate Environment         » Bank of England unlikely to increase policy rat...
2. How European Insurers are Coping » Product shift, gearing towards insurance risks and capital light products » Reducing...
2. Liquidity: A Non-Issue for Life Insurers? » We assume that insurers‘ liquidity is robust, avoiding the need to crystall...
2. Liquidity: A Non-Issue for Life Insurers?               Italian Life Insurance: Net Flows                              ...
3. P&C Insurance Profitability: An Uneven Picture               » Improving underwriting profitability for European P&C pl...
3. P&C Claims Reserves: Fat has Been Trimmed  » The ability of European insurers to smooth underwriting returns by releasi...
4. Solvency II: Broad Credit Implications» Radical overhaul of solvency and reporting requirements, risk management standa...
4. Solvency II: (Some) Remaining Uncertainties1.      Spread / illiquidity premium for some life insurance contracts     –...
4. Solvency II: What is The Road Ahead?                                                                                   ...
Appendices             European Insurance: Key Credit Issues   33
1. Eurozone Sovereign: Solvency Treatment                          Solvency Treatment                                     ...
Impact of Solvency II on Investment Decisions» We do not expect significant changes in the asset mix of European insurers,...
© 2011 Moody‘s Investors Service, Inc. and/or its licensors and affiliates (collectively, ―MOODY‘S‖). All rights reserved....
Petr VinsBranch Manager, CEET +420 – 224.222.929petr.vins@moodys.com
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Petr Vinš: Aktuální stav rizik v pojišťovnictví z pohledu ratingové agentury

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  • UK Insurers Senior rating: Prudential Plc (A2, stable); Aviva (A1, negative); Standard Life (Baa1, Stable); Old Mutual (Baa1, negative).Swiss Re (A1, positive); Allianz (Aa3, negative); Axa (A2, negative); Aegon NV (A3, stable).
  • austerity programmes
  • Italy Life premiums: -28.7% 9 months to SepHigher cost of funding for local banks, particularly in Italy, may mean higher deposit yield. Lack of interest of Italian banks to sell life insurance productsFairly close correlation between declining interest rates and net flows (B Report)
  • Petr Vinš: Aktuální stav rizik v pojišťovnictví z pohledu ratingové agentury

    1. 1. European Insurance: Key Credit IssuesPetr Vins, Branch Manager, CEE June, 2012
    2. 2. Agenda» Moody‘s European Insurance Ratings in Context 1. Recent Rating Actions» Key Credit Issues 1. Investment Exposure to Eurozone Sovereign and Banks 2. Life Profitability 3. P&C Profitability 4. Solvency II» Conclusion» Appendices European Insurance: Key Credit Issues 2
    3. 3. Moody’s European Insurance Ratings in Context Upgrades and Downgrades over the last decade Outlook Distribution European P&C / Multiline / Reinsurance Industry European IFSR Outlook Distribution, February 2012 30% 20% % IFSRs with +ve or -ve rating action Non-Life/Reinsurance 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012YTD Life -10% -20% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% RUR Neg Sta Pos Dev -30% Source: Moody’s -40% -50% -60% DNG UPG Source: Moody’s. P&C Includes Reinsures and Multilines 20% EMEA Life Industry 10% Outlook: Main European Markets% IFSRs with +ve or -ve rating action Main European Markets Outlook 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012YTD Benelux France Germany Italy UK -10% P&C Negative Stable Negative Stable Stable -20% Life Negative Negative Negative Negative Negative -30% Source: Moody’s -40% -50% DNG UPG -60% Source: Moody’s 2012 Started with Several Downgrades and the Outlook Remains Negative European Insurance: Key Credit Issues 3
    4. 4. Sovereign Rating Actions in February 20121. Downgrades concentrated among weaker nations – Slovenia, Slovakia (A2, neg) due to concerns over fiscal policy and weak banking sector – Malta, Italy and Spain (A3, neg) as well as Portugal (Ba3, neg) due to combination of weak growth prospects and challenging fiscal and debt metrics2. Negative outlooks for the “near-strongest” – Question marks over economic resilience and ability to achieve fiscal consolidation targets in the UK and France – Size of banking sector contingent liabilities in Austria3. Stable Aaa ratings for Germany, Netherlands, Finland due to strongest government balance sheets and high economic resilience Rating Realignment Reflects Divergent Vulnerabilities European Insurance: Key Credit Issues 4
    5. 5. Regional Rating Trends: Negative in Europe, Positive in Latin America Sovereign Rating at the on-set of the crisis, December 2007 Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 C Aaa0 America Aa1 Aa2 Asia-Pacific Aa3 Sovereign Rating as of April 2012 Europe A15 A2 LatAm A3 MEA Baa1 Baa2 10 Baa3 Ba1 Ba2 Ba3 15 B1 B2 B3 Caa1 20 Caa2 Caa3 C 25 European Insurance: Key Credit Issues 5
    6. 6. Moody’s Sovereign ratings in CEE – how we got here ? Rating History* Current 8 Year Change 2004 2005 2006 2007 2008 2009 2010 2011Czech Republic A1 0 A1 A1 A1 A1 A1 A1 A1 A1Estonia A1 0 A1 A1 A1 A1 A1 A1 A1 A1Poland A2 0 A2 A2 A2 A2 A2 A2 A2 A2Slovakia A2 +1 A3 A2 A1 A1 A1 A1 A1 A1Slovenia A2 -2 Aa3 Aa3 Aa2 Aa2 Aa2 Aa2 Aa2 A1Lithuania Baa1 -1 A3 A3 A2 A2 A2 Baa1 Baa1 Baa1Bulgaria Baa2 +3 Ba1 Ba1 Baa3 Baa3 Baa3 Baa3 Baa3 Baa2Croatia Baa3 0 Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 Baa3Latvia Baa3 -4 A2 A2 A2 A2 A3 Baa3 Baa3 Baa3Romania Baa3 +3 Ba3 Ba1 Baa3 Baa3 Baa3 Baa3 Baa3 Baa3Hungary Ba1 -6 A1 A1 A2 A2 A3 Baa1 Baa3 Ba1Turkey Ba2 +2 B1 Ba3 Ba3 Ba3 Ba3 Ba3 Ba2 Ba2Montenegro Ba3 -1 NR NR NR NR Ba2 Ba3 Ba3 Ba3Albania B1 0 NR NR NR B1 B1 B1 B1 B1Bosnia & Herzegovina B3 0 B3 B3 B2 B2 B2 B2 B2 B2 *Rating at year-end European Insurance: Key Credit Issues 6
    7. 7. A “New Normal” For CEE CEE Key Debt Metrics 7 The New Normal Interest Payment (% of Revenue) 6 2012F 2013F 5 2011 2009 4 2010 2004 2006 2007 2005 3 2008 2 25 30 35 40 45 50 Gen. Gov. Debt (% of GDP) Source: Eurostat and Official National Sources European Insurance: Key Credit Issues 7
    8. 8. Insurance Rating Actions in February 2012 (1/2)1. Significant operating and investment exposure to Italy and Spain – Italian insurers: Unipol (to A3 RuRd, -1 notch), Allianz SpA (to A1, negative, -1 notch), Generali (to A1, negative, -1 notch) – Spanish insurers: Mapfre (to A2, negative, -2 notches), Caser (to Baa1 RuRd, -1 notch)2. More limited operating and investment exposure but are under somewhat greater stress as a result of weak economic growth in Europe – Allianz SE, AXA SA and Aviva Plc: Negative outlook3. Affiliation with banks whose risk profile is deteriorating – Scottish Widows and Clerical Medical: Review down – Reaal Verzekeringen and SNS Reaal Group: Review down Three Reasons Behind the Insurance Rating Actions in February European Insurance: Key Credit Issues 8
    9. 9. Insurance Rating Actions in February 2012 (2/2) Euro Area Exposures Differ, but Downside Risks Increase for all European Insurance: Key Credit Issues 9
    10. 10. Banking Rating Actions in February 2012 Impacted European Banking Groups By Country Austria IMPACTED EUROPEAN BANKS TOTAL UK Switzerland Belgium Groups with an entity impacted in any way (RuR, 114 Denmark outlook change, downgrade) Sweden All BFSRs placed on RuR. Excludes Fortis Bank (outlook 99 Finland change) All entities with a BFSR (including mortgage 109 France institutions) where the LT rating is placed on RuR Spain All entities with a BFSR where ST rating is placed on 66 Germany RuR Ireland All entities with a BFSR where notching guidance 18 suggests possibility of LT rating falling below Baa3 Slovenia All entities with a BFSR where guidance suggests 30 Portugal possibility of ST P-1 rating falling to P-2 Norway Italy All entities with a BFSR where guidance suggests 17 Netherlands Luxembourg possibility of ST rating falling into NP The Adverse and Prolonged Impact of the Euro Area Crisis is Weighing on the Credit Strength of European Banks European Insurance: Key Credit Issues 10
    11. 11. CEE7 banking systems asset-weighted average ratings Standalone Rating (BCA) Parental / Coop Support Systemic Support Aaa Aa2 A1 A3 Baa2 Investment grade Ba1 Ba3 B2 Caa1 Caa3 C European Insurance: Key Credit Issues 11
    12. 12. European Insurance Ratings vs. Banks Major Nordic Banks Major Nordic Insurers LT RATING following the review IFSR Danske Bank Baa1, Stable IF P&C A2, Stable Pohjola DNB Bank A1, Stable Insurance Ltd A2, RuRd Nordea Bank Aa3, Stable Tryg Group A2, Stable SEB A1, Stable Major UK Banks Major UK Insurers Current Lowest expected LT RATING LT RATING following review IFSR Major German Banks Major German Insurers HSBC Bank Aa2, RuRd A1 PRU UK Aa2, Stable LT RATING Barclays Bank Aa3, RuRd A2 L&G Aa3, Stable following the review IFSR Lloyds TSB Bank A1, RuRd A3 Aviva Aa3, Neg Deutsche Bank Aa3, RuRd Allianz Aa3, Neg RBS A2, RuRd A3 RSA A2, Stable Commerzbank A3, Neg Munich Re Aa3, Stable Direct Line A2, Stable DZ Bank A1, Neg Landesbank Hessen A2, Neg Major French Banks Major French Insurers Major Dutch Banks Major Dutch Insurers Current Lowest expected LT RATING Current Lowest expected LT RATING LT RATING following review IFSR LT RATING following review IFSR BNP Paribas Aa3, RuRd A2 AXA Aa3, Neg ING Bank Aa3, RuRd A1 ING US A3 Credit Agricole Aa3, RuRd A2 MACIF A2, Stable SNS Bank Baa1, RuRd Ba1 AEGON US A1 Societe Generale A1, RuRd A2 SCOR A1, Stable Rabobank Aaa, RuRd Aa2 SNS Reaal Insus. A3, RuRd BPCE Aa3, RuRd A2 BPCE Aa3, RuRd A2 Major Spanish Banks Major Spanish Insurers Major Italian Banks Major Italian Insurers LT RATING following the LT RATING following the review IFSR review IFSR Banco Santander A3, Neg Mapfre A2, Neg Intesa San Paolo A3, Neg Generali A1, Neg BBVA A3, Neg Caser Baa1, Neg Unicredit A3, Neg Unipol A3, RuRd CaixaBank A3, RuRd Monte dei Paschi Baa3, Neg Bankinter Baa2, Neg European Insurance: Key Credit Issues 12
    13. 13. What Can Further Pressurise EMEA Insurance Ratings» Significant risks remain – Double dip recession in Europe – Persistent low interest environment in some countries – EU sovereign debt crisis: long-term repercussions with the risk of other sovereign downgrades – Liquidity strain scenarios for insurers, although still unlikely at this stage Significant Risks Remain European Insurance: Key Credit Issues 13
    14. 14. Eurozone Risk: The Market is Trading at a GAP with Moody’s Ratings Median Insurance Sector CDS-Implied Rating Gap Source: Moody’s The Rating GAP for European Insurers has Widened Over the Last 2 Years European Insurance: Key Credit Issues 14
    15. 15. 1. Eurozone Sovereign: The impact of Italy and Spain is starting to be felt Investments Mix of Rated European Insurers – Geographical Split of Sovereign Portfolio of YE 2010 Rated European Insures – YE 2010 Greece Ireland Portugal Structured Products Other Cash 1% 1% 4% 2% 5% Equities 1% 6% Spain Investment Funds 5% Loans 2% 9% Property 4% Italy Covered Bonds 17% 9% Others Sovereign Bonds 75% Corporate Bonds 32% 27% Note: Moody’s estimate based on rated European insurers. Gross basis, before policyholders’ participation and tax. Excludes UK with-profit. Italy and Spain Represent a Sizeable Portion of European Insurers‘ Assets European Insurance: Key Credit Issues 15
    16. 16. 1. Eurozone Sovereign: Greece, Ireland and Portugal have Little Direct Impact on European Insurers Impact of a default scenario of sovereign and banking securities in Greece, Ireland and Portugal (Loss given default assumption = 55%* ) Income statement impact, after tax, Gross losses as a % of before policyholders’ participation, Gross losses as a % of investments shareholders’ equity as a % of shareholders’ equity Domestic Domestic Domestic Sovereign banks Sovereign banks Sovereign banks default default Combined default default Combined default default Combined Greece 0.3% 0.0% 0.3% 2.2% 0.0% 2.2% 1.4% 0.0% 1.5% Ireland 0.2% 0.0% 0.3% 1.9% 0.3% 2.2% 1.3% 0.2% 1.5% Portugal 0.3% 0.0% 0.3% 2.0% 0.2% 2.1% 1.3% 0.1% 1.4% Total 0.8% 0.1% 0.8% 6.0% 0.5% 6.5% 4.0% 0.3% 4.4% Moody’s opinion on insurers’ ability to share losses with policyholders in this scenario High High High * 55% represents the expected loss of an issuer rated Ca Note: data above assumes bonds were held at 65% (Greece), 85% (Ireland) and 90% (Portugal) of face value, as of 31 December 2010, as well as a tax rate of 33%. The data does not allow for any exchanges that firms may undertake on Greek bonds, following the July IIF proposal. Loss given default denotes the amount of ultimate losses bondholders sustain in our scenarios (=total exposure less recoveries on defaulted bonds) Source: Moody’s Insurers Can Sustain Even Worst-Case Scenario for Greece, Ireland and Portugal European Insurance: Key Credit Issues 16
    17. 17. 1. Eurozone Sovereign: Life Customers Share The Pain Gross Exposure to Peripheral European Net Exposure to Peripheral European Sovereign as % of Shareholders’ Equity[1] Sovereign as % of Shareholders’ Equity[2] Note: Moody’s estimate based on rated European insurers. [1] Gross basis, before policyholders’ participation and tax. Excludes UK with-profit. [2] Net basis, after policyholders’ participation and tax A Key Difference for the Life Insurance Sector European Insurance: Key Credit Issues 17
    18. 18. 1. Eurozone Banks: a Second Order Impact Investments Mix of Rated European Insurers – Breakdown of Banking Debts for Rated YE 2010 European Insurers – YE 2010 Sovereign 32%Others49% Bank Subs & Prefs ~33% Bank Senior ~67% Banks 10% Covered Bonds 9% Note: Moody’s estimate based on rated European insurers. Gross basis, before policyholders’ participation and tax. Excludes UK with-profit. Financial Strength of Banks is Correlated to the Financial Strength of Sovereign European Insurance: Key Credit Issues 18
    19. 19. 1. Eurozone Banks: a Second Order Impact Geographical Split of Banking Exposure – (excluding covered bonds) YE 2010 Ireland Portugal 1% 0% Spain Greece 5% 0% Italy 5% Others 89% Note: Moody’s estimate based on rated European insurers. Gross basis, before policyholders’ participation and tax. Excludes UK with-profit. Deteriorating Financial Strength of Banks Impacts the Asset Quality of Insurers European Insurance: Key Credit Issues 19
    20. 20. 20 2. Insurance Profitability: Halved since 2007 Reducing Profitability for European Insurers1 … …with Mounting Capital Levels€bn €bn Net Income Shareholders’ Equity2 45 350 300 35 250 25 200 150 15 100 5 50 0 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 -5 Source: Moody’s Note: [1] Samples Iicludes AEGON, Allianz, Aviva, AXA, Generali, ING V., L&G, Munich Re, Old Mutual, Prudential Plc, Swiss Re and ZFS. Based on current exchange rates [2] Excludes Dutch State Capital for ING and AEGON A Combination of De-risking and Challenging Markets Has Reduced the Earnings Potential of the Industry European Insurance: Key Credit Issues 20
    21. 21. 21 2. Insurance Profitability: Challenging Fundamentals, Particularly in LifeImpact of Economic Environment on…Overall Profitability» Subdued growth» Lower disposable income» Lower consumer confidence» Higher impairments» (Risk of) increase in corporate tax …Life Profitability …P&C Profitability» Low interest rate environment » Higher propensity to claim» Lower unit-linked fees » Inflationary impact on claims» Depressed housing market» (Risk of) higher lapse rate P&C is Better Shielded than Life Given Its Compulsory Nature and Lower Financial Gearing European Insurance: Key Credit Issues 21
    22. 22. 22 2. Insurance Profitability: Goodwill and Other Intangibles Impairments» Goodwill impairments related to life insurance activities is an industry trend in 2H11 » Achmea (€279m, driven by HK business), ING (€0.5 billion, VA US), AXA (€1.1 billion, VA US), Allianz (€0.4 billion, Korea Life and banking Germany), etc.» Mostly related to low interest environment and challenging conditions in Benelux and US» Companies only have to test goodwill for impairment once a year» The absence of an impairment does not indicate that all is well – an issuer may have a level of headroom in its impairment calculations» Deduction of intangible assets is not applied in a consistent manner by all regulators in the calculation of Solvency I (for example, in some jurisdictions, deductions are made for deferred acquisition costs, while in other jurisdictions there are no deductions for this item) European Insurance: Key Credit Issues 22
    23. 23. 2. Stagnant Growth To Depress Sales of Life Products» Short-term growth in euro area revised down significantly» Mild recession in euro area in 2012 IMF Growth forecasts Euro area 2012 2013 3 2 1 0 Sept 2011 Jan 2012 Sept 2011 Jan 2012 Sept 2011 Jan 2012 Sept 2011 Jan 2012 Sept 2011 Jan 2012 Sept 2011 Country report Dec 2011-1 Euro Area France Germany Spain Portugal Italy-2-3 Source: IMF WEO Sept 2011, WEO update Deleveraging Affects Long-Term GDP Growth Jan 2012, 2nd Review under the Extended Arrangement, Portugal Dec 2011-4 European Insurance: Key Credit Issues 23
    24. 24. 2. Life Insurance Profitability: A Low Interest Rate Environment » Bank of England unlikely to increase policy rates until end of 2012 » European Central Bank reversing the interest rate increases of 2011 Life UK France Italy Germany Switzerland NetherlandsGuaranteed products as ~30% ~80% ~60% ~90% ~60% ~65%% technical reservesAverage portfolio ~0% ~1% ~2 - 3% ~3 - 4% ~3% ~3.5 - 4.5%guarantee rateAverage new business ~0% ~0% ~1 – 1.5% ~1.75% ~2% (1.5% from 2012) ~3%guarantee rateMoody’s view on the Very High High Medium - High Medium Medium Lowability to share lossesOverall risk of guaranteedproductsSource: Moody’s A Prolonged Low Interest Environment Erodes the Life Industry Profitability, Although Slowly and at Different Degrees European Insurance: Key Credit Issues 24
    25. 25. 2. How European Insurers are Coping » Product shift, gearing towards insurance risks and capital light products » Reducing guarantees » Managing duration gap tightly » Selectivity » Efficiency » Flexibility in crediting rates » Optimising investment portfolios » Hedging programs in place » Effectively capital management of old book of business Drawing from Experience European Insurance: Key Credit Issues 25
    26. 26. 2. Liquidity: A Non-Issue for Life Insurers? » We assume that insurers‘ liquidity is robust, avoiding the need to crystallize unrealised losses. However it could be pressurised in some countries by: 1. Reducing competitiveness of some life insurance products in the context of » A low interest environment » Reducing tax advantages » Mounting competition from banks and asset managers » Increasingly costly for shareholders‘ capital 2. Increasing lapse rates in some countries, due to economic pressures » Some life insurance markets have experienced some major decreases in premiums with periods of net outflows Liquidity Remains Robust, but could be Pressurised European Insurance: Key Credit Issues 26
    27. 27. 2. Liquidity: A Non-Issue for Life Insurers? Italian Life Insurance: Net Flows UK Life Insurance: Net Flows 35% 30% 25% 20% 15% 10% 5% 0% -5% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E -10% -15% -20% -25% -30%Source: ANIA Source: FSA French Life Insurance: Net Flows Inflows Livret A Yield Insurance Policies Average Net Yield 48 50 7 5% 5 4% Net flows - E billion 3 UR 3% Yield 1 2% Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec 2009 2010 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec -1 1% -3 2008 2011 -5 0% Source: FFSA European Insurance: Key Credit Issues 27
    28. 28. 3. P&C Insurance Profitability: An Uneven Picture » Improving underwriting profitability for European P&C players, particularly in personal lines, albeit at an uneven picture across countries » The recovery is driven by those countries where P&C tariff hardening has been a predominant feature for a prolonged period » Some climatic events have affected CoR in 2010 and 2009, particularly in France and Germany, less so in 2011 Italy France Germany UK Switzerland BeneluxMOTOR Pricing Trend 2010 Overall > 100% > 100% <100% >100% <100% Ne <100% P&C CoR Source: Moody’s Positive Underwriting Trends in P&C European Insurance: Key Credit Issues 28
    29. 29. 3. P&C Claims Reserves: Fat has Been Trimmed » The ability of European insurers to smooth underwriting returns by releasing P&C claims reserves has reduced » Overall, the magnitude of reserves releases has been declining since 2010, especially in motor insurance in the UK, Germany and Italy » In the UK the regulator expressed his views saying on reserves that ―increases in prior-year reserves may be necessary‖ » Consequently, we expect insurers‘ reported profitability not to improve at the same pace implied by the hardening of P&C pricing registered in some European countries The Ability to Smooth Underwriting Returns has Diminished European Insurance: Key Credit Issues 29
    30. 30. 4. Solvency II: Broad Credit Implications» Radical overhaul of solvency and reporting requirements, risk management standards and supervision» Regulatory capital requirements will increase from Solvency I, although most of the insurers we rate are unlikely to raise capital» Main consequences of Solvency II 1. Promotion of strong culture of risk management (Pillar II) 2. Non-EU subsidiaries could face higher capital (3rd country equivalence) 3. Equity and non investment grade bond holdings likely to (further) reduce 4. Quality of capital improved 5. Potential industry consolidation also for closed blocks 6. Incentive to seek approval of internal capital model The Overall Impact of Solvency II is not Expected to be Material Enough to Lead to Rating Changes European Insurance: Key Credit Issues 30
    31. 31. 4. Solvency II: (Some) Remaining Uncertainties1. Spread / illiquidity premium for some life insurance contracts – ECON1 Committee at the end of March discussed 3 separate adjustments to discount rates: ―Matching premium‖, ―Counter-cyclical premium‖ and ―Yield curve extrapolation‖ – ‗Matching premium‘ may now be used for certain illiquid liabilities particularly in UK and Spain, but is still unspecified2. Grandfathering of hybrid securities – Grandfathering similar to CEBS / banking rules (10 yrs or first call)?3. Equivalence of non-EU regulatory regimes – Wave 1: Switzerland and Bermuda, Japan for reinsurance – Temporary equivalence for 5 years expected for other regions (US) – What impact would ultimately (lack of) equivalence have for EU Groups? For non-EU Groups? For reinsurers? Note: [1] Economic & Monetary Affairs Committee - Sub-committee of the European Parliament ECON1 Committee of European Parliament Vote is a Fore-runner to Omnibus 2 legislation European Insurance: Key Credit Issues 31
    32. 32. 4. Solvency II: What is The Road Ahead? Q4 2012 – 1H 2013 Level 2 implementation to be passed January 2014 Formal 10 September 2012 Implementation Vote of the European Parliament on the final version of the Omnibus 2 (originally scheduled on 2 July) Q3 – Q4 2012 Omnibus 2 legislation appears in Official Journal Q2 - Q3 2012 21 March 2012 “Trilogue phase”: private discussion on Omnibus 2 as part ECON1 vote took place on proposal for of the trialogue process between the European Omnibus 2 Commission, Council and ParliamentNote: [1] Economic & Monetary Affairs Committee - Sub-committee of the European Parliament SOLVENCY II JARGON What’s Omnibus 2? This is a European directive to amend the original Solvency 2 directive in order to (i) allow for adjustments to the technical specifications, (ii) to grant powers and regulatory powers to EIOPA (ex CEIOPS), (iii) postpone the implementation date and include flexible transition arrangements, etc What’s Level 1, 2 and 3? 1: Sets out the basic principles of Solvency 2 and deadlines for implementation 2: EC defines specific technical requirements and need to take into account the Omnibus 2 directive. Includes the various QIS 3: Final stage of legislation in which EIOPA (ex CEIOPS) and national regulators develop technical standard and guidance supplementing Level 1 and 2 Approval of Omnibus 2 directive is the central focus for 2012 European Insurance: Key Credit Issues 32
    33. 33. Appendices European Insurance: Key Credit Issues 33
    34. 34. 1. Eurozone Sovereign: Solvency Treatment Solvency Treatment Temporary Amendments Italy Until 2011: Unrealised losses are recognised on Until 2011: ISVAP provides the ability not to Solvency metrics in full; unrealised gains may be recognise unrealised losses on E U recognised but are subject to locally enforced government bonds with the following admissible asset restrictions limitations: - Capped to up to 30% of available capital - Valid only at group level From 2012: A portion of unreleased losses on EU - Limit dividends distribution and need sovereign bonds NOT recognised, in the limit of 30% board of directors approval of the available capital France Net unrealised gains across the portfolio are recognised. Net unrealised losses across the portfolio are NOT recognised Germany Unrealised gains and losses on fixed income instruments are NOT recognised UK Both assets and liabilities are reported on a mark-to- market basis under the realistic balance sheet approach. Investments are typically held at fair value through P&L with consequent impact on capital and solvency levels Belgium Unrealised losses are recognised on Solvency metrics in full; unrealised gains on debt securities are NOT recognised Netherlands Unrealised gains and losses are recognised directly in equity or P&L with consequent impact on solvency levels Switzerland Swiss Solvency Test: Both assets and liabilities are reported on a mark-to-market basis with consequent impact on capital and solvency levels European Insurance: Key Credit Issues 34
    35. 35. Impact of Solvency II on Investment Decisions» We do not expect significant changes in the asset mix of European insurers, more marginally» Market risk accounted for 2/3 of the total SCR in QIS 5 Sol vency I Tr m ent I eat -“Gl obalequii ” ( tes EEA/ ECD count i )at r a capialr O res t act t equiem entof39% oft rm ar val and “ot equii ” and aler i i r hei ket ue, her tes t natve nves m ent one of49% t s -Undert as um pton ofcapialcos sof12% ,“ ECD Equii ”oughtt yi d atl t4. he s i t t O tes o el eas 68% ( 39*12% )t covert =0. o hecapialcos s t t .Thi et n t getappear eachabl peci l or sr ur ar sr e,es alyf lf i ur swih t rl ie ns er t hei ong- er i t enthorz t m nves m ion.M oreover ver ii i beneft ,di sfcaton iscoul r d educet efectveequiy rs he f i t ikchar byabouthal EI PA ( ge f( O 2011).Equii houl t ef e ) tess d her or r ai a vi e as etcl s em n abl s as . -“ t O herequii ”com prs a r tes ie ange ofas et ,prvat equiy,com m odii ,hedge f s s i e t tes undsand even i r t uct e i t ent consder r atvel s i n t sgr nfas r ur nves m s i ed el i y old.O hi oup,t hur e r e of he dl at Equii tes 5.88% ( 49*12% )i or chalengi and m i =0. sm e l ng ghtwel ead t a r ll o educton i alocatons i n l i .However ndus r i er ewspr ded lt l evi ,i t y nt vi ovi ite dence ofa r educton i t alocaton t t e i n he l i o hes aler i as et att ss age. t natve s s hi t -Ast heequiybacki r i orm anyl ge i ur sar onl t ng atosf ar ns er e y5–8% ,t m pactofSol hei vency I slkel o bes al n vi oft sz Ii i yt m li ew he ieofs ockm ar swordwi t ket l de.However hi s s ent ,t sas es m dif sacr sj idi i fer os urs ctonsand i ndus r egm ent .UK i ur s t ys s ns er ,aswel lass alerand m edi - ied com pani n ot m l um sz esi hercount i ,m ayhavet r res o educet requiyhol ngs ven t hei t di ,gi hatequiy t rs r ik ankshi ti t rover lm ar rs expos e. ghes n hei al ket ik ur -Si Eur nce opean gover entbondsi dom es i cur ency ar cl sfed asrs f ee underSol nm n tc r e as ii ik- r vency I,t e i a cl r I her s ear egul or i at y ncentve t i eas expos e t t sas etcl s i o ncr e ur o hi s as , i udi t eur ar perpher debt However m aj i ur ncl ng o o ea i y . , or ns ance com pani alo r y on i er rs m odel t accountf s ead and def trs on s es s el nt nal ik s hat or pr aul ik over gn debt eiGover entbonds nm -on balance,However,one m ay expectgr erdem and f ong- ed s ei debtwhi eat orl dat over gn ch,al s equal l ur hercont i e t l l lele ,wilf t rbut o ow ong- er i er t r es n addii ns er ’ t m nt es at .i ton,i ur s efor st r f t o educe t rdur i gapst t r nf ce t dem and f l hei aton end o ei or he or ong- ed gover entdebtfom an ALM per pectve dat nm r s i -Undert s andar f m ul Sol he t d or a, vency I capialchar have r atvel s eep dur i and cr tsopeswhi can be expect t l t s e por f i adj t ent I t ges el i y t aton edi l ch ed o ead o om t olo us m s -The capialr t equiem ent orcor at and cover bondsar cal at by m uli yi a r i i r sf por e ed e cul ed tpl ng atng-nduced s hock f orwih t dur i oft bonds BBB- at bond wih a act t he aton he .A r ed t dur i of10 t ef e r r aton her or equies25% ( 5% *10)i equiycapialbef edi sfcaton beneft .Thi or ul =2. n t t or ver ii i is sf m aappear o penals l st ie ong- er bondssncecr ts eadsatt ong end ar t m i edi pr hel e l svol ie t t e att s tend. es atl han hos he hor -The cr tsope i sm iary s eep.Cor at bondswih a l r i efectvel at r a capialchar sm iart t ofequii . edi l si ll t por e t ow atng f i y t act t ge i l o hat tes -Accor ng t t s andar f m ul he r i bas rs f orf di o he t d or a,t atng- ed ik act orcor at bondsvaresbet por e i ween 0. f 9% orAAA and 2. f 5% orBBB i t i n he nves m ent gr t - ade s egm entand i s l gerf hi yi d bonds( 4. ,B orl ar or gh- el BB 5% ower7. )5% .Cor at and cover bonds -Varousi por e ed i ndus r s udi her or cl m t t y t est ef e ai hati ur ns ance com pani m i t optm ie t ras etalocaton accor ng t t t esai ng o i s hei s l i di o hes andar f m ul d or aofSol vencyI l Iwilbuy m os l hor - ed tys t dat cor at bondsi t f ur snce t s ead t capialr r entr i i unf por e n he ut e, i he pr o t equiem ato s avour e f l abl or onger t m bonds - er -W ihi t cor at s t n he por e pace,t e i s m ovem entbet her salo ween s or hatm ay notr l ect st efectdif entalr fer i egul or char .Ther i at y ges e snow l sappett f i es ie orfnanci st al han wast he cas i t pas .M any i ur spl e n he t ns er aced tght i ison t rfnanci ect i erlm t hei i als orexpos e i r pons t t crss ur n es e o he ii.Thedesr o di sf hecor at bond por f i awayfom banksi iet ver iyt por e t olo r s s asa r i bot t hi corel i bet een eacton h o gh r atons ween fnanci sand t pr pectofl s s i arangem ent i t f ur i al he os os - harng r s n he ut e -Indus r i er ti new bank debti t um ent s ascontngentcapialappear t be unior l l t y nt es n ns r s uch i t so f m y ow -The r egul or t eat entoft i e A- at cover bondsappear or l entt at y r m rpl r ed ed sm e eni han thatofcor at bonds por e .Thecheapeni oft sas etcl shasl t at r i val i ng hi s as ed o t actve uatonsi n r aton t l capialr r ent underSol el i o ow t equiem s vency I I -UnderSol vencyI,t I hecapialchar ors r ur pr t gef t uct ed oduct st si hegr eroft ditnctchar .Thediectchar eat wo s i ges r ge,cores r pondi t a s ng o hockt t t uct ed pr o hes r ur oductis f olowst t el,f l he s e appr am oach asthatforcor at bonds( por e dependi on t r i oft s r ur pr ng he atng he t uct ed oduct .Anot ) herchar r at o s ge el est hockst to heas et s sunderyi t s r ur pr l ng he t uct ed oduct n m any .I cas ,t s“ es hi underyi char appear t be dom i . l ng ge” so nant -The capialr r ent huscal orcar uldocum ent i and com m and a hi rs char t equiem st lf ef aton gh ik ge,fequenty s o 100% f om e s r ur pr r l ett ors t uct ed oduct uch ast calnon- ss ypi AAA RM BS andSt uct ed pr r ur oducts CLO s .Thi ayi sm nducei ur st s lpar ns er o el toft rr ai ng as ethol ngs hei em ni s di .Thei ndus r sover loutookf hi s t y’ al l ort sas etcl si as sgener l negatve,asbot capialr r ent aly i h t equiem sand t ik hers ofilqui t durng a crssar r atvel hi li diy i ii e el i y gh. - EI PA i m i ulofQ I 5 par i pant ’r O s ndf S tci s eques t r t o educe t com pl t ofr es f t uct ed pr he exiy ul ors r ur oduct ,and pl s anst r o econsdert “ i he underyi char f t uct ed cr tbef e l ng ge” ors r ur edi or i pl ent i m em aton.Source: BIS, July 2011 European Insurance: Key Credit Issues 35
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    37. 37. Petr VinsBranch Manager, CEET +420 – 224.222.929petr.vins@moodys.com

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