Fitch: Insurers Face Mounting Pressure on Ratings Worldwide

October 16, 2008

Balance sheet pressures for insurance and reinsurance companies globally have become more severe as insurers experience greater unrealized market value losses, and take impairments, on their investment portfolios, says Fitch Ratings. As such, Fitch analysts expects a noteworthy ramp up in such losses to be reported by many insurers in the third quarter.

Accordingly, Fitch has revised the Rating Outlook to Negative from Stable for 12 insurance and reinsurance sectors globally, reflecting primarily the fall out from significant deterioration in the global financial markets, and its impact on insurers’ balance sheets and financial flexibility. Fitch is also confirming its prior held Negative Outlook on six insurance sectors, including the U.S. life insurance sector, which Fitch revised to Negative from Stable on Sept. 29.

The Negative Outlooks reflect the significant falls in global credit and equity markets, and unprecedented market volatility and uncertainty. Of greatest concern to Fitch are declines in the market value of investment holdings that have led to significant declines in economic capitalization and profitability for many insurers. Ongoing market volatility means there is potential for significant further reductions in capital as market values further decline, and additional impairments are recognized. Declines in investment performance are impacting essentially all insurers, to varying degrees.

The Negative Outlooks also reflect the much-reduced financial flexibility that many insurers, and financial institutions generally, have experienced under current capital market conditions. Limited capital markets access can be especially problematic if an insurer finds itself in a position of needing to raise capital to offset investment losses, but can not.

Finally, Fitch is concerned by the greater potential for liquidity strains for some insurance companies. Potential liquidity pressures are generally less severe for insurance companies than they are for other types of financial institutions. Nonetheless, Fitch believes liquidity could become pressured for some life insurance companies, as well as some reinsurance companies, especially if they experience declines in their credit profiles that lead to erosions in market confidence.

The Negative Outlooks imply that over the next 12 to 24 months, Fitch expects more downgrades than upgrades within each of the sectors. However, it does not imply that all, or even a majority, of ratings within each sector will necessarily be downgraded. The Negative Outlook applies equally to Fitch’s Insurer Financial Strength and fixed income security ratings of insurers.

Fitch believes that the prospective downward rating pressures are most significant for the life insurance sectors, and in particular for the U.S. life sector. Even so, Fitch believes that a number of life insurers are relatively well-positioned to cope with an environment of capital markets volatility and market illiquidity. Prior to the current challenges, many life insurers had built up significant capital buffers, following a period of favourable investment market conditions.

For the non-life insurance sectors, declines in investment values and capital have exacerbated other pressures that the sectors were already facing, including ongoing intense competition and soft premium rates in many lines of business, together with the expected general deterioration of underwriting results and expected reductions in reserve releases as compared to recent years. While capital pressures could ease the softening trend in non-life pricing, Fitch believes it would be premature to predict a shift to a hardening market.

Unlike life insurance companies, non-life insurers generally have minimal liquidity exposures as their products are not deposit-based or linked to institutional funding. However, Fitch believes that the Global Reinsurance sector could experience some liquidity pressure in the current environment. In many cases, reinsurers use bank letter of credit facilities to provide security for ceding companies. It is not uncommon for such facilities to contain ratings triggers that require the reinsurer to post cash collateral if their financial strength ratings fall below a defined level (typically below ‘A-‘). In addition, some reinsurance contracts contain cancellation or recapture provisions also tied to ratings triggers that could cause the reinsurer to fund the return of a portion of premiums to the ceding company in unwinding a contract.

Fitch notes that in the light of recent market pressures, governments in many countries have taken extraordinary measures to support their banking systems, including the provision of debt guarantees, extensions of deposit insurance and guarantees, capital investments, and in the U.S., the creation of a $700 billion fund to purchase troubled assets. While these programs have been primarily focused on stabilizing the global banking system, Fitch believes that should problems grow more significant and become widespread in the insurance industry, it is highly possible support offered via these programs will be extended to the insurance industry. This could temper downward ratings actions for these insurance companies.

The following is a list of insurance sectors, each of which now carry a Negative Rating Outlook by Fitch. The list also shows those cases in which the Rating Outlook was previously Negative and is being confirmed with today’s announcement.

–United States Non-Life;
–United States Health (previously Negative);
–United States Life (previously Negative);
–United States Title (previously Negative).
–France Life;
–France Non-Life;
–Germany Life (previously Negative);
–Germany Non-Life (previously Negative);
–Germany Health;
–Global Reinsurance;
–Italy Life (previously Negative);
–Italy Non-Life;
–Japan Life;
–Japan Non-Life;
–Switzerland Life;
–Switzerland Non-Life;
–United Kingdom Life;
–United Kingdom Non-Life.

Source: Fitch Ratings

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