S&P Report Analyzes European Insurers’ Profit Growth

July 7, 2004

According to a recent report issued by Standard & Poor’s Rating Services, “Europe’s insurers will continue to face challenges in delivering genuine ‘profitable growth’ over the next few years.”

“The sector remains focused on profitability at the expense of volume, but the mantra has now shifted subtly toward profitable growth,” indicated S&P credit analyst, Hans Wright. S&P said it “remains cautious about the continued optimistic messages coming from many insurers, however, as the definition of profitable often ignores some key risks.”

The report noted that “from a credit perspective, profitable growth demonstrates a successful business model. However, bottom-line profit retention can still be affected by a variety of factors that are typically excluded from insurers’ definitions of underlying profits.

“Notably, investment leverage remains high for some insurers, risk retention levels have generally increased, and long-tail risks continue to increase. As a result, insurers remain exposed to negative short-term investment fluctuations, losses from large events, and adverse reserve development, which can offset underlying profits. For those insurers unable to translate underlying earnings into capital, funding growth at a stable level of capitalization could be a significant challenge for the market.”

Wright stressed that “key among the risks associated with achieving profitable growth is the execution risk in insurers’ business models, many of which have been reshaped to respond to the changing market. The success of this reshaping, which focuses largely on the restructuring of distribution capacity and products, cost reduction programs, and more selective underwriting, will be measured by the degree of sustained profitability over the next few years.”

The full report, entitled “Industry Report Card: European Insurance”, was published on July 6, 2004, on RatingsDirect, Standard & Poor’s Web-based credit analysis system, at www.ratingsdirect.com. Ratings information can be found on Standard & Poor’s public Web site at www.standardandpoors.com.

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