S&P: G-SII Designation Could Affect Ratings in the Longer Term

July 24, 2013

The longer-term rating implications for insurers that the Group of 20’s Financial Stability Board (FSB) has designated global systemically important insurers (G-SIIs) will be mixed, according to a report published by Standard & Poor’s Ratings Services.

The report – “Possible Ratings Implications For Global Systemically Important Insurers” explains “how the new requirements that the G-SII designation imposes have both positive and negative ramifications for the insurers in question,” S&P said.

“We see the requirements for G-SIIs to hold more capital and to enhance the quality of their capital instruments as positive for the ratings, all other things being equal,” said credit analyst Rob Jones. “However, at the same time, we believe these changes could lead to a higher cost of capital, which we generally see as ratings negative.”

Jones also pointed out that “G-SIIs will face heightened regulatory oversight, and this could also have either positive or negative repercussions–positive in terms of the potential avoidance or early detection of risk, and negative in terms of strategic constraints and regulatory burden.”

The report also notes that “the new requirements may motivate a G-SII to restructure–for example, by ring-fencing or divesting its systemically risky activities. A G-SII designation may also enhance the insurer’s competitive position in the eyes of its customers and investors compared with non-G-SIIs.”

S&P indicated that “some G-SIIs may try to exploit their new status by highlighting implied government support. However, we do not expect the new designation to change governments’ behavior toward G-SIIs or insurers generally. Unlike global systemically important banks (G-SIBs), no G-SII or other insurer benefits from direct government support, other than certain government-related entities.

“Therefore we do not expect the new G-SII designation to change the way we differentiate between G-SIIs and G-SIBs in our analysis of banks and insurance companies. Our approach reflects that whereas most G-SIBs benefit from direct extraordinary government support from their domestic markets, G-SIIs do not.

“We do not anticipate that governments would provide capital or liquidity to insurers since their business models do not generally involve on-demand liabilities that are akin to bank deposits. Furthermore, insurers can generally be run-off (or ‘resolved’ in banking parlance) in an orderly fashion, whereas banks generally cannot.”

In addition S&P indicated that there “are two instances where insurers may benefit indirectly from government assistance. First, highly systemically important banks can utilize government support–should it become available–to support their core insurance subsidiaries. Second, governments can come to the aid of large insurers if they experience severe solvency difficulties that might otherwise disrupt the provision of insurance and have adverse social and employment consequences.”

S&P listed the following nine insurers that the FSB has designated G-SII:
Allianz SE;
American International Group Inc.;
Assicurazioni Generali SpA;
Aviva PLC;
MetLife Inc.;
Ping An Insurance (Group) Co. of China Ltd.;
Prudential Financial Inc.; and
Prudential PLC

Source: Standard & Poor’s

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