Standard & Poor’s has revised the outlook from stable to negative on French protection insurer AG2R Prevoyance’s and its core subsidiary PRIMA. The insurer financial strength and counterparty credit rating on both companies has been affirmed to ‘A-‘.
The negative outlook reflects uncertainties about AG2R’s ability to sufficiently turn around its underwriting performance to positive, and whether it can make a stable contribution to its earnings, particularly through tighter risk selection, increased cross subsidies within its portfolio of risks, and increased contributions from its policyholders.
Here is Standard & Poor’s report :
We believe that the insurer’s earnings generation ability will remain constrained in the medium term. We view AG2R’s operating performance as having deteriorated since year-end 2010, due to its limited ability to fund rising claims experience with commensurate contribution increases and risk management actions. Exacerbating this is the cost of French pension reform, which we believe will be challenging to fully fund through increased contributions. Furthermore, we expect AG2R’s underwriting earnings this year to be negative as a result of increasing claims in the accident & health (A&H) and worker’s compensation/disability (WCD) segment. The long-tail WCD line, which still reports very high loss ratios, is hampering the loss ratio in A&H. The profitability of group protection is also generally limited by granular profit-sharing policies that limit cross subsidies at the company’s aggregate level, which in turn limits the ability to source surpluses from this business.
The ratings continue to reflect AG2R’s strong competitive position and strong investment profile. Partially offsetting these factors are only good operating performance and financial flexibility.
AG2R has built a strong foothold in multiple industries thanks to its historical roots in the sectorwide agreement business (“conventions collectives”). The AG2R-La Mondiale Group is a well-recognized brand in France, covering complementary client bases and product ranges in life, savings, and A&H. However, we believe that AG2R’s concentration in France and a high reinsurance cession rate partially offset its strong competitive position.
We view AG2R’s investment profile as strong with manageable market and credit risks. However, we believe that a legacy of high exposure to hybrid debt issued by financial institutions hampers the company’s quality of investments.
We view financial flexibility as “good” relative to its our assessment of its needs. The insurer’s capital needs stem principally from organic growth, which we do not expect to be highly capital-demanding in the next two years. We believe, however, that the most important source of funding is earnings generation and retention. Therefore, AG2R’s flexibility is dependent on generating strongly profitable business to maintain strong capital adequacy.
Source : S&P
