According to a Moody’s Investors Service report, falling bond and equity prices resulted in a significant decline in reported shareholders’ equity, though capital adequacy remains a key strength for Europe’s big four reinsurers, confirming the cohort’s capacity to absorb future shocks.
Rising rates were positive for the sector’s regulatory Solvency II and Swiss Solvency Test regulatory capital ratios, notes Moody’s, offsetting a likely increase in capital requirements due to business growth and capital market volatility.
The cohort’s reported shareholders’ equity fell by around a quarter on average in H1, mainly reflecting lower unrealised gains on fixed income investments as rising interest rates weighed on bond prices, says Moody’s.
The report states that differences in accounting standards and in the average duration of fixed income investments had a significant impact on companies’ sensitivity to these changes.
SCOR reported a relatively modest reduction in shareholders’ equity, whereas Swiss Re reported the largest.
Though, higher interest rates also reduce the market value of liabilities, which is a clear positive, says Moody’s. This is reflected in the reinsurers’ more economic regulatory solvency frameworks under Solvency II and the Swiss Solvency Test.
Moody’s affirmed all companies reported a further increase in their already very strong solvency ratios since the year-end of 2021.
Most of the reinsurers did not disclose their capital requirements in Q2 of 2022, however, it appears likely that these increased in most cases, suggests the report, driven in part by higher layers of nonproportional business, which is more capital-intensive than proportional business.
