The European insurance market is continuing to enjoy a period of stability and profitability, according to a new Standard & Poor's report.

But possible clouds on the horizon include the U.S. hurricane season and further mergers and acquisitions activity, said London-based S&P analyst Hans Wright, the author of the report.

While failures are not expected, further large losses because of U.S. storms would create both winners and losers, despite a strengthening of rates over the past couple of years.

"Losers would be those more dependent on third parties for recapitalizing and those heavily dependent on reinsurance/retrocession," Mr. Wright said. "Winners would be already well capitalized, with good diversification of risk."

Ironically, a quiet hurricane season will damage the pricing environment going forward as buyers will view 2004/2005 as a blip and try to negotiate lower prices, he added.

The report said European insurers and reinsurers are looking at different strategies for development, depending on the potential for internal restructuring and whether existing markets have the ability to deliver growth.

Allianz, ING and Munich Re are continuing to improve results through internal re-engineering, for example, while Swiss Re and AXA have shown an appetite to grow via major acquisitions, S&P reported.

The significant fall in equity markets in the second quarter of this year has provided a timely reminder of the risk to earnings and capital from exposure to equities. But the report said that insurers are better prepared for volatility than in the past, with less exposure and actively managed downside risk.

"Insurers are far less exposed to equity risk than at the beginning of the decade, and continue to actively manage downside risks and exposures more realistically," Mr. Wright said.

Rising interest rates since the beginning of 2005 have also helped insurance companies in Europe, especially as most are invested in short-term securities, S&P found.

"Regulators and internal risk models have forced insurers to hold more capital against such risks, which guarantees a more realistic view of the risk-reward trade-off," the report said.

The Solvency II series of new capital requirements soon to go into effect is likely to add consolidation pressure across European markets in advance of implementation, the report said.

Special Reports /

Euro Insurers Seen Stable, Profitable

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