Thursday, 15 December 2011
Rating agencies tighten screw on insurers as sovereign crisis deepens
Fitch Ratings this week downgraded the Insurer Financial Strength rating of a number of Italian insurers including Assicurazioni Generali and Fondiaria-SAI. Fondiaria reportedly told a subsequent press conference that it may have to raise fresh capital as a result.
The rating agency also affirmed Mapfre SA’s Issuer Default Rating (IDR), but revised the outlook to negative from stable. The rating actions follow Fitch’s assessment of the insurer’s pro-forma capital adequacy amid challenging investment conditions, particularly in Italy and Spain, including ongoing pressure from heightened government bond yields.
And last Friday Standard & Poor’s warned 15 European insurers that they may face a downgrade if the euro crisis deepens.
It now seems increasingly likely that it will be problems on the asset side of the balance sheet rather than the ever-rising catastrophe losses—not least from Thailand—or pressure from Solvency II, that will finally force a hardening of the European commercial insurance market.
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Fitch said that its action followed a series of stress tests carried out in Italy and Spain. It concluded from the tests that large investment concentrations in sovereign debt gathered by some insurers ‘require distinction’ relative to similarly rated peers.
“The potential for these concentrations to result in poor capital performance under extreme scenarios is a key driver of the rating actions,” stated the agency.
Fitch added that if the outlook for sovereign debt improves and stabilises, it is likely that insurer ratings could be upgraded should their actual and pro-forma capital ratios also improve.
The rating actions also reflect Fitch’s view that the environment in Italy and Spain is ‘highly challenging’ and ‘rapidly changing’, which means that operating profitability is likely to remain pressurised in the medium term.
Fitch noted, however, that underwriting profitability in the non-life segment continues to recover as pricing and claims experience improve.
The rating actions were as follows: Assicurazioni Generali’s Insurer Financial Strength (IFS) rating fell from ‘A-’ from ‘AA-’, Fondiaria-SAI’s IFS rating fell to ‘BB-’ from ‘BB+’, Societa Reale Mutua di Assicurazioni’s IFS rating was downgraded to ‘BBB+’ from ‘A-’ and ITAS Mutua’s IFS rating fell to ‘BBB’ from ‘BBB+’. All the Italians have negative outlooks. In Spain, Mapfre’s Issuer Default Rating (IDR) was affirmed at ‘A-’ but the outlook changed to negative.
News agency Dow Jones subsequently reported that Italian insurer Fondiaria is considering all possible options in response to the move, including a capital increase, to strengthen its ratios.
Director General Piergiorgio Peluso reportedly made the comments on Tuesday when asked to react to press reports that claimed the insurer may be forced to announce a rights issue for €600m.
On Monday Fondiaria’s board named Goldman Sachs as an independent adviser to evaluate measures to strengthen its financial position.
Meanwhile, Allianz, Aviva, Axa, Generali and Mapfre were among 15 insurers that were warned by S&P they could face a downgrade as they were placed on creditwatch after 15 of the 17 countries of the eurozone were placed on watch.
"Our more recent negative adjustments to Europe's economic growth prospects and the potentially heightened credit risk...only serve to compound the difficulties that insurers face," stated the rating agency.
S&P's warning even threatened a one-notch cut to the AAA status of Germany, the Netherlands, Finland, Luxembourg and Austria.
It is possible that AAA-rated France could be hit with a two-notch cut, along with other countries currently rated below AAA.
S&P also warned that the eurozone's €440bn financial stability fund (EFSF), which depends on the AAA ratings of six eurozone countries, could also lose its top rating.
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