Profits at Europe’s insurers unlikely to rebound soon as investments suffer, says Moody’s
Profits at European P&C insurers will be pressured for longer than first thought as investment returns take a hit, according to Moody’s.
It said that low interest rates and falls in government bond yields will chip away at investment returns for Europe’s P&C insurers, while rate increases have been unable to keep pace with claims inflation.
“Persistently low yields will erode the investment returns of P&C insurers, weighing on their profitability and, to a lesser extent, their solvency,” said Dominic Simpson, vice-president, senior credit officer at Moody’s. “Claims inflation has largely offset the P&C sector’s efforts to raise prices, casting doubt over the sustainability of current reserve releases, a key contributor to earnings,” he added.
Europe’s largest P&C markets in the UK, France, the Netherlands and Germany have seen government bond yields fall about 35 basis points in 2020. In the UK, ten-year gilt yields have fallen 65 basis points to a near-record low of 0.17%.
But Moody’s pointed out that French and Dutch insurers rely more heavily on investment returns, with combined ratios running at 98% and 100%, respectively.
Moody’s said investment returns make up about half of European P&C insurers’ profits on average. Falling bond yields mean maturing assets are reinvested at rates below the investment yield. At the same time, lower interest rates reduce the discount rate for long-tail reserves and raise the value of future liabilities, Moody’s said.
