Moody's upbeat despite catastrophes

Despite external influences such as the recent turmoil in some credit markets, some weather-related catastrophic events in Europe (Winter Storm Kyrill and July’s UK floods) and continuing pressures from competition and regulations, European insurers have reported stable or improved underlying operating results further strengthening their balance sheets in the first half of 2007.

The European insurance industry therefore continues to enjoy ratings stability and good results according to Moody’s.

As a result, in recent months, European insurers are still actively channelling generated excess resources into franchise-enhancing acquisitions or capital management initiatives such as share buy-backs or minority buy-outs.

Despite some uncertainties in the financial markets for the coming months and potentially further earnings pressure, Moody’s expect that the operating environment for European insurers will remain supportive to rating stability in the short term - provided there are no severe external shocks or financial market corrections.

Furthermore, the ratings agency expects M&A and capital management initiatives to continue. Although liquidity in credit markets could represent an important constraint in the short term, given potential higher funding costs, tighter underwriting standards or higher risk aversion from investors.

After a difficult few years at the beginning of the decade and a period of restoring balance-sheet strength and re-focusing on their core capabilities, European insurers have recently been very actively pursuing franchise enhancing acquisitions or acquisitions in growth markets.

These actions should generally be long-term rating-positive given the potential for strengthening market position, franchise, distribution capabilities, service levels and/or the risk profile of the insurers involved and of the overall industry.

The consolidation of the industry has accelerated as a result of these M&A activities, with well-managed capital-generating organisations acquiring less efficient organisations or niche players. Moody’s expect this process to continue. The market would probably agree.