8 May 2013 Insurance

New S&P criteria could mean downgrades

New criteria for rating insurance companies unveiled by rating agency Standard & Poor’s (S&P) this week is likely to result in ratings changes – including downgrades – but it’s not yet clear how many insurers will be impacted.

That is the view of Stuart Shipperlee, partner of ratings advisory firm Litmus Analysis, who also notes that even if a relatively small percentage of ratings change, this could still mean hundreds of insurers being affected.

S&P said the new criteria are intended to enhance the transparency of its ratings taking into account new rating factors to assess the impact of industry and country risks, prospective capital adequacy, and risk position.

Shipperlee said that while ratings on over 2000 insurers have been put ‘under observation’ following the introduction of the new criteria, this does not mean most ratings will change. “Indeed, S&P has stressed that only a minority will. The ’under observation’ status is a regulatory requirement when introducing new criteria,” Shipperlee said.

He notes that in guidance S&P has released on the likely impact on ratings, the rating agency said only a minority will probably be impacted with a one notch rating change and more ratings will be raised than lowered.

But he also points out that their language does allow for some two or more notch rating changes although the implication is that this will be unusual and adds: “Even if 90 per cent did not change, that would leave over 200 ratings that will. Our guess is that it may actually be a bit lower still than that but we can’t be sure.”

In a statement this week S&P said: “Our aim is to transparently disclose rating factors and clearly specify how we use them to evaluate the creditworthiness of insurance companies and arrive at ratings outcomes. Consistent application of these criteria is intended to enhance the forward-looking nature and comparability of our ratings across industry sectors and geographies.”

The criteria documents published this week include ‘Insurers: Rating Methodology’, which examines how eight rating factors determine the credit profile of businesses and the ‘Group Rating Methodology’, which discusses how external support from a subsidiary's parent group is dealt with.

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