Moody’s: European Insurance CFOs optimistic

03.03.2014 – moodys-logo-150A survey of the Chief Financial Officers (CFOs) of 37 insurers — including some of the largest Europe-based multinational insurance groups — indicates that most expect their company’s operating profit to grow moderately in 2013-2014, says Moody’s Investors Service in a new Special Comment published today. Although Moody’s shares the expectations of European CFOs on a good number of important topics, the CFOs are more optimistic on some issues.

“Profitability expectations among surveyed CFOs were generally high, and more optimistic than our own view. Nearly half of responding CFOs said they expected their company’s operating profit to grow between 5 Percent and 10 Percent next year, with 16 Percent expecting stronger growth, above 10 Percent,” explains Laura Perez-Martinez, a Moody’s analyst and author of the report. Conversely, Moody’s expects the industry’s operating profits to remain broadly stable with some moderate downside pressures, particularly for life insurers in a good number of countries across Europe mainly driven by the sluggish economic outlook and persistently low interest rates. The low interest-rate environment and weak economic growth are the two biggest worries for CFOs according to the survey responses, which coincides with Moody’s view. Asked to name their top concern, 37 Percent of respondents cited persistently low interest rates. Next in line were Europe’s continued weak economic growth and the uncertain macroeconomic environment, cited by 32 Percent of respondents.
The persistently low interest-rate environment has prompted most life insurers to adjust both their investments and the pricing and guarantees on their new products, which has diverse credit implications. Moody’s believes investment changes often lead to higher levels of risk, which is a credit negative. However, the rating agency generally views revisions to new business products aimed at optimizing returns on economic capital as a credit positive.
Surprisingly, only 20 Percent of surveyed CFOs said they expected further material changes in their investment allocations to higher-risk assets. This may be due to the pooling of life and non-life insurance groups as a good number of non-life insurers may have already significantly readjusted their investment allocations over the last year, given their more liquid and easily accessible investment profile. Nevertheless, Moody’s expectation is for a modest increase in investment risk for most insurers in Europe in the short to medium-term, which the rating agency generally views as a credit negative.

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