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S&P : comments on prospects for ratings on global multiline insurers in face of market turmoil

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Standard & Poor’s new report entitled “Sovereign Exposure and Market Volatility Could Pose Heightened Threat To Ratings On Global Multiline Insurers” was released today. This report shows that the continuing adverse conditions in investment markets are putting insurer financial strength ratings on global multiline insurers to the test.

Here is S&P’s release :

“Our attention is particularly focused on capital adequacy, which we have flagged as a rating weakness for many of the global multiline insurers (GMIs) covered in this report, particularly given the once again tumultuous investment markets,” said Standard & Poor’s credit analyst Lotfi Elbarhdadi.

“However, our concerns are tempered by our positive views about their broad geographic spread and asset and liability diversification,” added Mr. Elbarhdadi.

We are also looking at the ability of management teams to weather stormy markets through efficient enterprise risk management and adequate management actions. Besides lower equity prices, widening credit spreads and decreasing interest rates, which are dampening investment returns, are weighing on earnings. Plus, they have probably offset the positive impact of management actions in the past few months to restore capital strength and operating performance. Falling stock prices for the GMIs and widening credit spreads in our view are further constraining their financial flexibility.

The substantial exposure of GMIs’ fixed-income portfolios to sovereign bonds and banks in general makes them vulnerable to the consequences of a potential turn for the worse. This could also pressure the ratings, depending on the size of a particular GMI’s exposure. However, based on our view of their diversified and strong credit quality investment portfolios, as reflected by their on average strong credit ratings, we have not carried out any negative rating action on a GMI on the back of the recent downgrades of the U.S. and Italy. The ratings have also held up well after the downgrades of Greece, Ireland, and Portugal.

Under our criteria, we believe that relatively deficient capital adequacy is likely to become an increasing source of pressure on ratings. Our rating analysis factors in, however, earning generation abilities and actions that management may take to preserve capital. These actions include asset and liability derisking measures, conservative crediting rates for policyholders, and earning retention policies.

We continue to view capital adequacy as a rating weakness to varying degrees for many of the Europe-based GMIs covered in this report. Current market conditions have, we believe, largely erased the improvement in GMIs’ risk-adjusted solvency ratios in the first half of 2011. These market trends are also likely to put an even greater drag on GMIs’ efforts to rebuild capital adequacy through earnings generation, in our opinion.

Source : S&P