S&P Issues Report on French Mutual Sector

A newly issued report from Standard & Poor’s concludes that “France’s mutual insurance sector remains healthy, but its long-term prosperity is being threatened by external competition and exposure risks.”

S&P noted that the “growing penetration of France’s mutual retail banks in property/casualty insurance presents a threat to mutual insurers’ long-term dominance of the sector. Meanwhile, a lack of geographical diversification, combined with a recent increase in severe weather activity in Central Europe, has increased the market’s concentration risk.”

“France’s mutual insurers maintain a strong and stable revenue stream from their domestic retail property/casualty market, due to their tight pricing, good risk selection, and sound levels of solvency,” observed S&P credit analyst Yann Le Pallec. “However, competition is growing as the banks make inroads into the sector, most notably by cross-selling home insurance policies on the back of aggressively priced mortgage lending.”

S&P said it “believes that the banks’ ability to generate sustainable revenue streams in property/casualty insurance and retain client policies is a function of their expertise in setting up and maintaining reactive, high-quality claims-handling back offices.”

Le Pallec noted that “To date, there are few breakaway leaders from the banking market that have been able to manage a sustainable insurance business, due in part to the substantial investment required to set up such an operation. Nevertheless, bank-owned operations are deemed likely to become a major threat to France’s mutual insurers over the longer term.”

The report also found that “a more immediate weakness in the French mutual insurance sector is its limited income diversification and higher sector fragmentation than public insurers. Although efficient and reactive distribution and disciplined pricing have led to an enviable competitive position for the mutuals, their lack of diversification by either geography or line of business has resulted in an operating environment that remains limited and therefore subject to concentration risk.”

“French mutuals’ revenues tend to be dominantly derived from the French territories, where the frequency of natural catastrophes has risen,” noted S&P credit analyst Emmanuelle Calès. “As the backbone of mutuals’ underwriting is motor and home insurance, with little diversification into life and health, their exposure risk to any future storm damage remains high.”

There’s also a positive aspect to the lack of diversification, however. S&P indicated that it does provide “room for future expansion.” The rating agency noted: “In the highly mature French market, where the cost of acquiring a new client is three times that of selling a new policy to an existing customer, those mutuals that have saturated their client bases with motor and home insurance policies will increasingly look to cross-sell life and health policies. Meanwhile, maintaining the current buoyancy of the French mutuals is their strong level of solvency and a growing ability to tap the capital markets.

“Although France’s mutual insurers have more limited financial flexibility than their shareholder-owned competitors, they have built up a substantial level of capital as a result of cautious risk management and conservative reserving practices. Moreover, subordinated debt instruments are now more readily available to mutual insurers than ever before.”

“Due to the current favorable interest rate environment and as part of a more active management of their financial structure, French mutuals are expected to resort increasingly to hybrid debt,” Calès concluded.

The report, entitled “French Mutual Insurance Sector Review”, is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit analysis system, at www.ratingsdirect.com. Ratings information can be found on Standard & Poor’s public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find Ratings, then Credit Ratings Search.

Copies may also be obtained by contacting S&P’s offices, as follows: London Ratings Desk (44) 20-7176-7400; London Press Office Hotline (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5916; or Moscow (7) 095-783-4017.