European commercial insurers earn high ratings, but several are assessed by just one agency
At first sight, the average rating outcomes — the Litmus Composite Scores — for BI’s European commercial lines list mimic the very high degree of sector strength seen in BI’s recently published global reinsurance list. But the underlying context is different in two ways.
Additionally, the potential upgrade to Beazley’s operating companies’ ratings now that the Zurich transaction has closed may well be seen as a significant positive for buyers, notwithstanding Beazley’s already high ratings.
As we noted in the reinsurance article in the last edition, the aggregate ratings strength of that list was systemically important. The potential for a major, sector-wide hit to capital across the global reinsurance sector is very real. While that could also be the case for European commercial lines insurers, the likelihood is lower, partly because underwriting risk profiles differ more between the groups, and partly because of their individual use of reinsurance to cede severity risk.
The importance of the typically high average ratings in the sector, A to AA, is more idiosyncratic than systemic. Large commercial lines buyers need to know that the groups covering their existential risks have the scale and financial strength to handle them.
The second difference from the reinsurance list is the lower number of agency ratings overall for the reference insurers shown in the table. Six have only one rating: three have a rating from S&P alone — Ergo Versicherungs, MMA IARD, Vienna Insurance — two from Fitch Ratings alone — Gan Assurances and R+V Allgemeine — and one from A.M. Best alone — Mapfre Espana.
Since several of the groups that these insurers are a part of have two or more agencies covering other parts of their operations, it suggests European commercial lines buyers are less concerned about seeing more than one rating for an insurer than reinsurance buyers. A somewhat surprising outcome.
Ratings are forward-looking opinions — in effect, forecasts — and, by definition, will sometimes be viewed in hindsight as having been too positive or too negative. Given the fundamental risk management significance of commercial lines coverage to many companies, we would have expected European commercial lines buyers to be as keen to see more than one rating on their insurers as reinsurance market buyers, especially since this would be their typical experience when buying reinsurance for a captive.
Zurich Insurance’s acquisition of Beazley illustrates the potential importance of further enhancing an already high rating. The Beazley syndicate already provides policyholders with a rating average of AA- paper via the Lloyd’s of London market rating. But Beazley Insurance DAC’s current LCS mapping is A+, which is the average of ratings from Best and Fitch. It is likely that the rated Beazley insurers may be seen by both agencies as sufficiently strategically important to Zurich from the outset to climb to AA- or AA. At this high end of the rating scale, any upgrade to Beazley’s current rating might seem moot. But for long-tail and some specialty lines, higher is still better for many buyers.
While policyholders already insured by insurers from both groups involved in the acquisition will be taking somewhat greater group-level concentration risk, Beazley’s notable position in cyber, for example, may well make any such rating enhancement a material positive for at least some of its clients. It may also lead to ratings from Moody’s and/or S&P being assigned at some point to the Beazley insurers, since both rate current Zurich group insurers.
Stuart Shipperlee is head of analysis at Litmus Analysis in London. He can be contacted at [email protected].