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The Actuary The magazine of the Institute & Faculty of Actuaries

Q3 market swings take toll on insurers' capital adequacy

Although many insurers had substantially rebuilt their balance sheets from their 2009 low point by mid-year 2011, the ratings service said that it expects that many boards of directors will need to carefully review their third-quarter results and financial positions.

"In the past quarter, we have seen the credit quality of certain sovereigns and banks decline, and the economic outlook deteriorate. The effect has been amplified by a sharp fall in interest rates, depressed equity markets, and increased volatility. All these factors helped weaken insurers' third-quarter economic earnings and balance sheets," S&P said.

"These trends are compounded, in our view, by the potential impact of industry-wide projects, such as implementing the EU's Solvency II directive on insurance supervision, the International Accounting Standards Board's Phase 2 insurance accounting project, and the Financial Stability Board's designation of globally systemically important financial institutions, now expected in 2012," it added.

As a result the bias of S&P's ratings is negative for the sector. Of its current ratings, 16% carry negative outlooks or CreditWatch placements, compared with 7% with positive outlooks or CreditWatch placements. The remaining 77% carry a stable outlook.

Despite this S&P said its view of the sector was strong relative to other rated corporates. The average long-term issuer credit rating on the 125 Western European insurance groups it rates stands at 'A-'.

Source: Insurance Insight