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Law360, London (May 28, 2020, 11:55 AM BST) -- European insurers have successfully pulled through the COVID-19 crisis without taking a major hit to their capital reserves, ratings agency Standard & Poor's said Thursday.
The ratings giant said that insurance companies in the bloc had strong cash reserves going into the global pandemic, which has shaken markets and given economies a beating, thanks to the European Union's strict capital regime, the Solvency II Directive.
S&P said in a report published Thursday that EU insurers have weathered the biggest financial shock since the rulebook came into force in 2016.
Taos Fudji, credit analyst with S&P Global Ratings, said the good results are a consequence of "strong ratios going into 2020 and features of Solvency II that cushion shock from equity price drops and widening credit spreads."
But the ratings agency added that potential downgrades to speculative grade from investment grade in the near future could dampen the strong solvency positions of some companies.
Fudji said that companies that have taken a hit to their capital reserves as a result of the pandemic will not necessarily face ratings downgrades.
"We do not anticipate that declines in [Solvency II] ratios will have implications for insurers' financial strength ratings," Fudji said. "However, hybrid ratings for issuers with lower-than-average or more volatile ratios could experience pressure if ratios decline beyond our expectations."
The solvency ratio is a measure of how much capital an insurer holds to pay out on claims. The regulatory minimum is 100%.
S&P also warned that strong results under the Solvency II review would not necessarily mean insurers would perform as well under the agency's own capital buffer calculations. Fudji said these results do not "rule out a more severe impact under our capital model, depending on the individual profile of each company."
The ratings agency said that its overall assessment of the bloc's insurers was positive.
"We still have stable outlooks on most of the insurers we rate based in the European Economic Area," Fudji said. "We consider solid capital positions and broad diversification of insurers in the region will continue to support the creditworthiness of many of them."
Insurers across the bloc have been hit hard by the virus.
Insurance giant Munich Re said this month it expects to face claims of up to €800 million ($880 million) this year from the pandemic. Its profits slipped 65% as a result.
Swiss Re said in April that it faces a $476 million hit in the first quarter of the year from claims linked to the coronavirus pandemic and a further investment loss of $300 million because of volatility in financial markets.
European risk managers called on the European Commission on Wednesday to devise a new framework for insuring businesses against disasters such as COVID-19 and climate change after the pandemic exposed deficiency in the sector.
--Additional reporting by Martin Croucher. Editing by Ed Harris.
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