Fitch: Financial Fallout May Cut Insurers’ Ratings

Fitch Ratings warned today it is likely to reduce the ratings of European and U.S. insurers and global reinsurers because the global financial meltdown will soon force them to write down the value of their investments.

The firm said this action is likely for 12 insurance and reinsurance sectors globally, including the health, property-casualty, life and title insurance sectors in the U.S., as well as the property-casualty and life sectors for France, Germany, Italy, Switzerland and the United Kingdom.

As a result, Fitch analysts said, the firm has decided to revise its rating outlook to negative from stable for these sectors.

Among other issues, it voiced particular concerns about global reinsurers due to their ceding arrangements, which makes them especially vulnerable to ratings downgrades.

All the warnings primarily reflect the fallout from “significant deterioration in the global financial markets and its impact on insurers' balance sheets and financial flexibility,” the rating firm said.

The company voiced particular concern for life insurance companies and for the liquidity of all insurers, and also raised a red flag for global reinsurers.

“Potential liquidity pressures are generally less severe for insurance companies than they are for other types of financial institutions,” Fitch analysts noted.

Nonetheless, the analysts said, “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.”

But, it said, it believes the life insurers will be able to cope because prior to the current rolling instability in worldwide financial markets, “many life insurers had built up significant capital buffers, following a period of favorable investment market conditions.”

And for the property-casualty insurers, 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 analysts cautioned that “it would be premature to predict a shift to a hardening market.”

As for reinsurers, the analysts noted that they could face some liquidity pressures in the current volatile financial market environment.

In many cases, reinsurers use bank letter of credit facilities to provide security for ceding companies, the analysts said. “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-minus’).”

In addition, the analysts said, “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.”