Fitch Sees Mounting Pressure on Insurance Ratings Globally

Balance sheet pressures for insurance and reinsurance companies globally are becoming more severe as insurers experience greater unrealized market value losses and take impairments on their investment portfolios, according to New York-based Fitch Ratings. Fitch anticipates a substantial 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 fallout 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 financial institutions 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 cannot.

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.

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 favorable 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.

Peggy Bresnick Kendler has been a writer for 30 years. She has worked as an editor, publicist and school district technology coordinator. During the past decade, Bresnick Kendler has worked for UBM TechWeb on special financialservices technology-centered ... View Full Bio