Fitch: No Further Rating Actions on European Insurers from Stress Tests Endorsement Policy
27 Jan 2012 4:03 AM (EST) Fitch Ratings-London-27 January 2012: Fitch Ratings says that it does not expect to take any further rating actions on European insurers as a result of its most recently updated eurozone stress test analysis.
During the latter part of 2011, Fitch had downgraded several Italian and Spanish insurers due to their performance on the stress tests, including Assicurazioni Generali, Fondiaria-SAI, Societa Reale Mutua Assicurazioni and ITAS Mutua (see "Fitch Takes Rating Actions on Italian and Spanish Insurers" dated 13 December 2011 at www.fitchratings.com). The downgrades reflected these insurers' concentration in certain eurozone sovereign and bank debt. Earlier in 2011 Fitch had also downgraded French insurer Groupama SA and its core subsidiaries due to its sovereign exposures (see "Fitch Downgrades Groupama's IFS to 'BBB'; Outlook Negative" dated 27 September 2011 at www.fitchratings.com).
The stress test assessed the degree of sensitivity of the insurers' capital adequacy to the "extreme case" of a haircut of 25% of their holdings of peripheral eurozone government and bank debt at year-end 2010. Ratings were impacted in cases when the pro-forma impact on the variability of capital was more severe than Fitch viewed as reasonable for the rating category. Fitch notes that its extreme case is not Fitch's expected case, and the 25% haircut should be viewed as an assumed "tail" loss.
Other risks, such as liquidity risk or the risk that sovereign issues may trigger a contagion of negative capital market performance of other asset classes, have been considered qualitatively, but were not part of the quantitative stress test.
In conducting its stress test analysis, Fitch considered the impact of potential mitigants. An important mitigating factor is policyholder participation in investment losses, in the case of participating (with-profit) life insurance contracts. Life insurers generally have the ability to pass certain investment losses to their policyholders. In its analysis, Fitch allowed for at least 50% policyholders' participation based on its experience and analytical knowledge of profit-participation models in the different jurisdictions where the affected companies are domiciled.
However, for high levels of exposure to peripheral sovereign debt (in particular, the Italian life business), Fitch believes that the ability to share losses with policyholders would be severely constrained, given the high likelihood that the return on customer portfolios may be below the minimum guaranteed to policyholders, in the stress test scenarios considered.
The agency also considered other mitigating factors, including tax deductibility of potential impairments/realised losses and possible management actions.
Fitch notes that while it has concluded its current stress test review, if FYE 2011 reporting indicates that the level of exposure to these securities has grown materially higher than Fitch's expectations for any given company, Fitch would expect to re-run the stress test for such companies and take any indicated rating actions. In addition, if there are significant adverse developments either for individual insurers or at the capital market level, Fitch will incorporate them in an updated stress analysis and take rating actions as appropriate.
Conversely, if capital market conditions improve and the outlook for sovereign debt stabilises, it is possible that some of the recently downgraded insurers' ratings could be upgraded if their actual and pro-forma capital ratios also improve.
www.fitchratings.com/creditdesk/...r_id=740803&origin=home
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