31st May 2020

S&P Global says rated European insurers have successfully weathered the biggest market shock to their Solvency II ratios
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As a result of fallout from the coronavirus pandemic, European insurers rated by S&P Global Ratings have successfully weathered the biggest market shock to their Solvency II ratios since January 2016, when the regulatory framework was launched, S&P Global Ratings said in a report published this week, "European Insurers: Capitalization Appears Resilient Under Solvency II, Somewhat Less Under Our Capital Model."
"That's thanks to strong ratios going into 2020 and features of Solvency II that cushion shock from equity price drops and widening credit spreads," said S&P Global Ratings credit analyst Taos Fudji. "However, that doesn't rule out a more severe impact under our capital model, depending on the individual profile of each company.
Plus, over the next quarters, potential downgrades of companies to speculative grade from investment grade(so-called fallen angels) could weigh on Solvency II ratios and our own measure of capital adequacy under our model.
We do not anticipate that declines in SII ratios will have implications for insurers' financial strength ratings. However, hybrid ratings for issuers with lower-than-average or more volatile SII ratios could experience pressure if ratios decline beyond our expectations. We expect that recent market volatility will erode capital buffers under our model, but this is unlikely to lead to widespread rating actions.
Indeed, hybrids issued under Solvency II have mandatory deferral features at the point of breach of solvency capital requirements.
For financial strength and issuer credit ratings, we continue to use our capital model to give us a consistent starting point from which to assess an insurer's financial risk profile, by indicating the broad range of capital adequacy on an eight-point scale.
In addition, our assessment of capital adequacy (in the form of a three-year forecast) is just one input of our ratings methodology, which also includes our assessment of business position and capacity of management to take action to regenerate capital over the forecast period.
As such, a change in our assessment of capital adequacy does not necessarily lead to a change in ratings. We still have stable outlooks on most of the insurers we rate based in the European Economic Area. We consider solid capital positions and broad diversification of insurers in the region will continue to support the creditworthiness of many of them."

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