Although the recent summit of the 27 countries of the European Union did manage to come up with a plan to control budget deficits – in the future – it “took no clear short term actions to address the debt crisis,” said Carlos Wong-Fupuy, A.M. Best’s Senior Director, Analytics in London.
He acknowledged that there may not be any solution in the short term. This uncertainty triggered Best’s recent announcements of downgrades for some of Europe’s largest insurers, including Italy’s Generali, Germany’s Allianz, and Spain’s MAPFRE RE.* Best also placed the ratings of those companies, as well as a number of other EU-based insurers and their subsidiaries, under review with negative implications, including several U.S.-based subsidiaries of France’s AXA Group,* and the UK’s Aviva.
“These companies [or their parents] all have sizeable life insurance operations in common,” Wong-Fupuy said. As a result their investment positions are more heavily affected by the turmoil in the euro zone, than is the case with basically non-life (P&C) companies. “Our rating actions were more on the life side,” he confirmed.
He also pointed out that Best has taken no negative rating actions on Europe’s big reinsurers, with the exception of the Caisse Centrale de Réassurance (CCR), which is closely tied to the French government, as it guarantees payments from CCR. In fact, Best recently upgraded Swiss Re to ‘A+’ (Superior).
Best didn’t make all of those rating decisions overnight. “We’ve been following the market for months,” Wong-Fupuy said. “Almost since the crisis started we’ve been conducting ‘stress tests,'” i.e. analyzing the overall exposures of the companies Best rates to the euro zone’s fiscal crisis.
More recently those stress tests “showed a much more serious potential impact on Spain and Italy.” The companies that were downgraded all “have significant investment exposures in these countries,” he added. However, Wong-Fupuy indicated that Best’s actions weren’t directly related to the overall economic weakness of Spain or Italy, but were more due to the fact that “the capital positions [of the companies involved] were exposed to additional credit risks.”
Best is making sure that it’s in a position to respond to any future changes, which, at this point are expected to be on the down side. “Their capital positions are strong,” Wong-Fupuy said, “but we are reviewing them, as there are also significant risks. If something happens we need to be prepared.”
Most of the affected companies are members of global groups, which in turn explains why Best has also taken a number of rating actions on their subsidiaries outside of Europe.
Its ratings on Fireman’s Fund were put under review with negative implications, as it is seen as an essential component of the Allianz Group, making it subject to Best’s actions taken on a group basis. “Ratings of subsidiaries factor in the support from the parent company, and they are therefore affected,” Wong-Fupuy said.
Best’s reviews are ongoing. “We will reassess the situation in three to six months, when hopefully it will be a bit clearer,” Wong-Fupuy said. “There may be more rating actions, as we monitor companies to see what they are doing to mitigate their exposures.”As we receive new information we hope to resolve the under review status.” But he also warned that “there may be some negative ratings actions.”
*The ratings apply to subsidiary companies, as Best does not publish ratings on their parent companies.
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