Credit profiles and rating migration of Insurance industry in Europe

(Under the Guidance of R.P.D. Sir)

Credit Rating

A credit rating is an assessment of an entity’s ability to pay its financial obligations. the ability to pay financial obligations is referred to as “creditworthiness.”

Credit ratings apply to debt securities like bonds, notes, and other debt instruments (such as certain asset-backed securities) and do not apply to equity securities like common stock. Credit ratings also are assigned to companies and governments.

A credit rating is an assessment of the creditworthiness of a debt instrument or obligor, based on a credit rating agency’s analytical models, assumptions, and expectations. While historical financial and operating experience and collateral performance may factor into the analysis of an obligor, credit ratings are simply a prediction of how an obligor may behave in the future.

Credit Rating AgenciesA credit rating agency is an entity which assesses the ability and willingness of the issuer company for timely payment of interest and principal on a debt instrument.

What is insurance?

Insurance of any type is all about managing risk. For example, in life insurance, the insurance company attempts to manage mortality (death) rates among its clients.

It facilitates economic transactions by providing risk transfer and indemnification. It encourages risk management and the promotion of safe practices. It promotes financial stability by providing long-term investment in the economy.

Insurance makes a major contribution to economic growth and development.

It encourages stable and sustainable savings and pension provision.

Insurance Industry in Europe

With a 33% share of the global market, the European insurance industry is the largest in the world, followed by North America (30%) and Asia (29%).

The insurance sector has the largest pool of investment funds in the European Union, with almost €8 400bn invested in the global economy in 2012. This is equal to 58% of the GDP of the EU.

The European insurance sector is a significant employer, both in terms of direct and indirect employment.

• Distribution structures across EU markets are diverse, adapted to consumers’ needs and constantly evolving.

• The European insurance industry faced a rather challenging environment in 2011. A number of factors, such as the sluggish economy, low interest rates and a continuing need for expenditure reduction, appeared to affect insurers and more particularly life insurers.

In 2011 the number of companies in the 32 countries that are full members of Insurance Europe fell by almost 3% to slightly fewer than 5 500. This decrease is mainly explained by a drop of nearly 8% in the UK, which — with about 1 200 insurance companies in 2011 — is the largest market in terms of insurer numbers.

In 2010 employment in the European insurance industry remained relatively stable at around 960 000 people after a 5% drop reported in 2009.

Available data for 2010 indicate that more than 86% of European employees work full-time, although this proportion has been decreasing slowly over the last 10 years (from 89% in 2001).

Top 10 Insurance companies in Europe

Criteria for credit rating

Individual Financial Strength Assessment (IFSA)

Three sub-factors are included within the ‘Operation Environment’ which group the key elements that determine the economic, legal and regulatory environment where an Insurance company sets and develops its business model.

Corporate Governance is an important factor in determining the quality of management, the fulfilment and predictability of the strategic plan and long-term performance. It therefore affects the long-term financial stability and sustainability of any Insurance company.

Sustainability and Competition factors are tools that any company should develop to successfully position itself within the competitive environment and implement a successful business strategy. The ability of an Insurance company to scale its operation with a healthy grow to gain a stable market share, provides a basis for long-term earnings, competitiveness and therefore financial sustainability.

• Insurance companies with a proven ability and expertise to successfully manage underwriting and investment risks are likely to maintain their long-term individual financial sustainability. An Insurance company’s ability to generate operating profits under a solid risk management framework in terms of underwriting policies, investment strategy and product risk management is analysed and challenged, based on the operation environment and diversification strategy.

• The last component of the IFSA is focused solely on financial analysis, and for the case of Insurance companies includes a detailed view on Capital, Reserves, Liquidity and Profitability. This analysis provides a set of ratios to assess the financial soundness of Insurance companies, both Life and Non-Life, which is then used also for peer comparison.

External Support Assessment

External Support Assessment (ESA) is combined with the IFSA to determine the final Credit Rating. The ESA is on the likelihood of support from an identified ‘External Support Provider’. The support providers identified are:

1. Parent / Holding Company

2. National Systemic

After the identification of the ‘External Support Providers’, the ‘Level of Support’ that would eventually be obtained is assessed.

Through a set scoring system one of the four levels of support listed below is identified: 1. Low 2. Moderate 3. High 4. Very High

The AXA Group

• In Europe, AXA operates in the life insurance, property-casualty, asset management, assistance, international insurance markets and retail banking.

• AXA Group, a worldwide leader in financial services, operates in 56 Countries with over 157,000 employees and 102 million customers.

• AXA in the UK:Has around 13 million customersEmploys approximately 10,500 peopleHas been ranked 22nd in The Sunday Times Top 25

Best Big Companies to work for Survey 2014Has been awarded the 'Positive about Disabled

People' symbol from the Department of Employment

Zurich Group

• Zurich operates globally and locally, according to the customers’ needs. It delivers insurance products and services in more than 170 countries.

• Founded in Switzerland in 1872, Zurich is one of the world’s most experienced insurers. Customers choose Zurich to protect the people and things they love because they value Zurich’s knowledge, expertise and stability.

• Zurich has three core business segments – General Insurance, Global Life, and Farmers.

Prudential Group

• Prudential plc is an international financial services group with significant operations in Asia, the US and the UK.

• It serves more than 23 million customers and have £443 billion of assets under management. It is listed on stock exchanges in London, Hong Kong, Singapore and New York.

• The Group is structured around four main business units: Prudential Corporation Asia, Jackson National Life Insurance Company, Prudential UK and M&G.

• Prudential uses long-term thinking to create long-term value. Through the strong financial performance and international strategy, it creates financial benefits for the shareholders and investors and delivers economic and social benefits for the communities in which it operates.

• In the UK, it is a leading life and pensions provider with approximately 7 million customers.

Thank You!!- By Shivesh Aggarwal (R. No. 966)