French insurers could enjoy greater ratings stability through 2014 despite lingering downside risks, a Standard and Poor report said today.
Based on 15 French insurance groups and 36 rated entities, S&P said it believed that its ratings on the sector showed prospects for greater stability in the next two years than in 2011 and 2012.
Of the insurers polled, 73% had stable outlooks, said the ratings agency.
In contrast, at the end of June 2012, stable outlooks represented only 32% of the total and 68% of the ratings had negative outlooks and CreditWatch placements. The current distribution reflected S&P's expectation of greater ratings stability through 2015.
'Low industry and country risk for both life and property/casualty (P/C) in the French markets, which compares favorably with those in most other European markets, supports our view about the sector's stability,' said S&P's credit analyst Gwenaelle Gibert.
In particular, the P/C underwriting earnings showed 'good potential for stability', underpinned by good reserving and life insurance. This was driven by the absence of high guaranteed rates and good earnings potential from the non-savings business.
The agency said: 'The market boasted strong balance sheet liquidity.'
Furthermore, capital adequacy improved with the pickup in earnings and in the investment markets over the past year which 'helped rebuild cushions relative to the ratings level', added the ratings agency.
But ratings on French insurers remain exposed to some downside risks, said Merryleas Rousseau an analyst at the agency.
Rousseau said such sensitivity included 'capital adequacy to investment market conditions, and a potential narrowing in earnings capacity due to stiff competition'.
Despite improvements during 2012, capital adequacy remained a ratings weakness and was subject to growing asset risks.
Moreover, the market remained highly competitive, which could constrain the potential for strong underwriting margins because of low interest rates. S&P said that it expected to see a number of regulatory initiatives reshape investment practices, product offerings, and the competitive landscape for the life and P/C businesses, which could weigh on earnings potential.
Gibert added: 'Despite a general downward trend over the past year, our ratings on French insurers remain in the "A" category on average, denoting what we deem as strong financial strength characteristics.'
