The ongoing low interest rate environment is expected to pressure the operating performance of global multiline insurers (GMIs) throughout the remainder of 2017, but superior capital adequacy has helped the sector outperform the industry average, according to ratings agency S&P Global Ratings.
Interest rates have remained low for some time now, dampening investment returns for global insurers and reinsurers at a time of reduced profitability on the underwriting side of the balance sheet, driven by ample capacity and high competition.
With little sign the interest rate environment is going to turn anytime soon, staying low in many regions and recovering only slightly in other parts of the world, S&P expects reinvestment rates to remain under pressure.
Volker Kudszus, an S&P Global Ratings credit analyst, commented; “The GMIs, as a group, have withstood the challenge better than their less diversified competitors. However, we expect low interest rates will keep GMIs’ operating performance under pressure through the rest of this year.”
The low interest rate landscape was the greatest test for GMIs in 2016, and through 2017 S&P expects the trend to continue with profitability eroding, ultimately leading to a decline in the attractiveness of their solutions. A trend that S&P says is particularly evident in the life insurance sector.
A number of GMIs have been seen to increase their capital adequacy since the financial crisis, which S&P says supports the strong capital adequacy of the group of GMIs.
The ratings agency notes that 2016’s results show that catastrophe events have increased to more normal levels, but despite this, some GMIs’ non-life segments are still managing to outperform life operations.
“Overall, GMIs have been performing better than the industry average, displaying superior capital adequacy and stronger ratings. We do not expect to see a material shift in capital adequacy in 2017,” explains S&P.
Over the last five years, S&P says that GMIs’ total adjusted capital has improved by an average of 6% each year, which has seen capital exceed S&P’s ‘AA’ capital adequacy requirements by 4%.
