Where will the eurozone rating axe fall next?

Brokers’ alarm bells are ringing again over insurer ratings as Mapfre battles to avoid becoming the next victim of the eurozone crisis.

UK-based managing general agency Global Aerospace, which places business on behalf of a clutch of big-name aviation firms, dropped Mapfre as a capacity provider after it was stripped of its top-tier rating on 15 October and cut to BBB+.

This was followed last week by Standard & Poor’s (S&P) cutting trade credit insurer Atradius’s rating from A- to BBB, citing the sovereign debt exposure of Atradius’s main shareholder, Spanish insurer Grupo Catalana Occidente.

All eyes are now firmly on what happens next to Mapfre, which owns travel insurer InsureandGo and an assistance business for UK brokers.

Mapfre’s problems have echoes of Groupama’s, as both insurers are suffering from exposure to countries in the teeth of the eurozone crisis.

Mapfre is heavily exposed to the Spanish sovereign, which is set to seek a full bailout next month, while Groupama has written down billions of euros in Greek debt.

Brokers fear the eurozone crisis could claim Italy as its next victim, triggering a fresh round of downgrades. A solid rating is now a must.

Struggling insurer dropped
Oval Insurance chief executive Peter Blanc said: “We won’t renew policies with any insurer that slips below an ‘A’ rating - we will recommend that the client moves to another carrier if they don’t meet our security criteria.” He said that Oval had already dropped one struggling insurer, even though it had the backing of a heavyweight parent.

However, Oval will still use a poor-rated insurer if a client insisted and signed a disclaimer. This would be useful only if a junk-rated insurer wrote the line of business that a client desperately needed.

You’re looking at almost one in four insurers having a credit negative outlook’

Mark Button, S&P

But a rival chief executive said that even this might not be tough enough, as such agreements might not “hold up in court”. The source added that many smaller brokers have had much more rigorous Treasury committees in the wake of the credit crunch.

The big lesson, though, might be for insurers themselves. He said: “We had a fantastic relationship with Groupama, but rules are rules, however much we might like the business. Maybe it’s a bit of a shock to insurers, a bit of a lesson to them, that brokers are willing to say ‘no, this credit rating is simply not acceptable’.”

Even if insurers heed the warning and work harder to better balance the risk profile of their investments, the market is so volatile that such an improvement cannot be guaranteed.

S&P senior insurance analyst Mark Button said that in Europe in the first nine months of 2012 there had been three rating downgrades for every one upgrade.

Button said: “There has been an increase in sovereign-related risks - Greece, Spain, Italy and Portugal in particular - with such low interest rates and a continuously poor economic outlook.You’re looking at almost one in four insurers having a credit negative outlook.”

On the bright side, albeit limited, that leaves well over 70% of insurers with at least a ‘stable’ outlook, while the actual average credit rating, A-, is unchanged from the start of the year.

Romero Insurance Brokers managing director Simon Mabb said that the generally grim news has meant that he has to spend more time keeping tabs on credit ratings and keeping clients informed of changes.

“There was so much change in ratings in the wake of the AIG crisis that you have to keep up with all this,” he said. “This is now a stock item on a weekly compliance meeting agenda. We’ve had to understand ratings better and we have to help a lot of clients who don’t really know the difference between an AAA or a BBB-.”

Unrated insurers on rise
The use of unrated insurers has been a hot topic in the solicitors’ professional indemnity (PI) insurance market. A few days before the renewal deadline, unrated PI provider Lemma Insurance Europe collapsed, having been the 10th biggest player in that market with a £6.24m premium two years earlier.

UIB divisional director Simon Lovat said that unrated insurers represent 20%-25% of total written capacity in the market. He added: “That’s the highest it has ever been. I’m not sure that there is anything we can do to tackle it. The Law Society and the Solicitors Regulation Authority are quite happy that their members are getting cheaper insurance.”

Lovat admits that though this is a “risky” attitude, there have been few examples of solicitors suffering because of using unrated insurers.The SRA takes the view that if the insurer can do the job it said it can, that is reason enough to not encourage solicitors to look at more credit-worthy but more expensive options.

That’s quite an alternative view for an industry that is almost entirely based on an assessment of risk that is as objective as possible. But it is also a balance between that conclusion and the price paid, which could be as much as 40% lower when it comes to PI cover.

What does seem certain is that the longer eurozone leaders take to sort out their woes, the greater the likelihood there is of insurers
seeing their credit described by that dreaded four letter word: ‘junk’.

Spanish insurer on slippery slope

Spanish financial woes have heaped pressure on insurer Mapfre after a downgrade by Standard & Poor’s (S&P) of the Spanish government’s sovereign debt rating by two notches to BBB-.

As a result the Spanish (re)insurance group was last week stripped of its A- insurer financial strength rating, with its core operating entities cut to BBB+ by S&P.

The action has been felt in the UK, where Mapfre’s operations include travel insurer InsurerandGo and Mapfre Assistance. A spokesman told Insurance Times: “From an InsureandGo perspective, while obviously disappointed, we do not foresee that this will adversely affect either our day-to-day business or the travel insurance business of Mapfre Assistance in the UK. Both are on target to make record turnover and profit in 2012.”

The S&P downgrade also prompted a reaction from UK-based aerospace insurer Global Aerospace to reorganise its aviation pool by increasing some pool members’ shares and wiping out Mapfre’s 10% share.

Global Aerospace chief executive Nick Brown said the company only includes higher rated securities within the pool.

“While Mapfre remains a strong and well-diversified insurance group, our customers expect from Global Aerospace nothing less than A-rated security,” said Brown.

“We have therefore put in place arrangements for a number of our pool members to increase their shares to replace Mapfre security on our syndicates.”