Defaults may rise again in 2012 as insurance industry remains in ‘nervous state’

S&P also noted that the European insurance sector enters 2011 in a ‘nervous state’, with concerns over the implications for the industry of regional and global economic trends compounded by fears over Solvency II and the International Accounting Standards Board's (IASB's) Phase 2 insurance accounting project. The trailing 12-month European speculative-grade default rate was 5.9% at the end of September 2010, down from a peak of 14.8% at the end of third quarter 2009, S&P said in its report. The default rate is expected to fall to about 4% by the end of 2010, taking it to below its long-term 4.3% average for the first time since the fourth quarter of 2008, and is expected to fall slightly further to 3.8% by the end of 2011. This would equate to 27 European companies with speculative-grade credit ratings or private credit estimates defaulting during 2011, the company explained. hide"Corporate default rates in Europe should remain relatively low in 2011, but we think this will mark only a temporary respite," noted Blaise Ganguin, Standard & Poor's Ratings Services Chief Credit Officer for Europe. More restrictive monetary policies and growing refinancing risks will likely precipitate a resurgence of defaults in 2012 and 2013, the rating agency said, mainly among leveraged buyouts (LBOs) that were launched between 2006 and 2008, driving the default rate to 6.5% or even slightly higher in 2012, it warned. “These companies face major challenges refinancing about €230bn of debt maturing before 2016. They will be competing with about €16tn of debt issuance expected from corporate and sovereign borrowers over the same period, at a time when the economy may be feeling the effects of tighter monetary and fiscal policy, anaemic consumption and limited lending capacity by banks,” said S&P. It also noted that while most sectors will benefit from stabilising and even improving business outlooks next year, sovereigns, banks and to a lesser degree insurance companies could see their credit quality erode further. “The European insurance sector enters 2011 in a nervous state. While insurer balance sheets and capital adequacy are mostly restored from their low point in the first quarter of 2009, concerns regarding the implications for the industry of regional and global economic trends are compounded by worries relating to the potential impact of Solvency II regulation and the International Accounting Standards Board's (IASB's) Phase 2 insurance accounting project,” said S&P. Across the sector, 25% of current ratings are carrying negative outlooks or creditwatch negative placements, it added, but the sector remains strong relative to other corporates, with an average long-term issuer credit rating of 'A-'. Among European nonfinancial companies, the overall number of rating actions has started to slow, reflecting a more stable operating environment. “Rating upgrades started to outpace downgrades in the third quarter of 2010, and we expect this improvement in corporate credit quality to continue. Sectors that we anticipate may suffer weak business conditions in 2011 include the utilities, steel and downstream oil and gas sectors. Very low short-term interest rates for the time being continue to enable lenders to take a pragmatic approach to supporting the high proportion of companies that still have overlevered balance sheets,” explained S&P.

Defaults may rise again in 2012 as insurance industry remains in ‘nervous state’

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