Fitch Foresees Continued Downward Rating Activity

Downward rating activity on insurers will likely continue throughout 2009, with a heightened level of activity over the next several months, according to recent Fitch Ratings comments.

Fitch, which previously moved its rating outlook for most insurance regions and sectors globally to “negative” throughout 2008, said downgrades should be limited to one or two notches in the vast majority of cases.

The downgrades will impact insurance operating companies' insurer financial strength (IFS) ratings and both long- and short-term debt and hybrids security ratings of holding companies, Fitch said.

Downgrades are expected to be greater among life insurers as they have higher investment leverage, exposures to products such as variable annuities, and higher yet generally manageable liquidity exposures compared to non-life insurers, according to Fitch.

The ratings impact will also likely vary by region, Fitch said, noting, for example, that Japanese insurers tend to have larger direct common stock investment exposures compared to companies in other parts of the world.

“Ultimate ratings migration will be broad-based, potentially impacting over half of Fitch's rated universe of insurance ratings, but will also likely be shallow,” Fitch said.

Fitch said it believes the insurance industry has fared better throughout the current financial crisis than other financial institutions, including financial guarantors, mortgage insurers, broker/dealers and commercial banks.

But Fitch added many insurers are feeling significant pressures from the financial crisis, mainly via sharp declines in the market values of their investment holdings, and diminished financial flexibility as capital markets remain closed to a number of companies and very expensive for those with access.

Fitch said it believes the potential for government-provided capital is real for some other of the larger, stronger insurance companies. “For example,” Fitch said, “a number of U.S. life insurers have made applications under TARP. If provided, government-funded capital or other forms of financial support could potentially temper downward ratings actions.”