Fitch Ratings Releases April Edition of ‘Insurance Insights’ Newsletter
Apr 19, 2011
The following is a reprint of the Fitch Ratings “Insurance Insights” newsletter published on April 19, 2011:
Welcome to the April edition of Insurance Insights – the monthly round up of Fitch Ratings’ special reports, industry trends and company research for the insurance markets. For comprehensive coverage of the insurance sector as it’s published, please regularly check our website for updates.
Property/Casualty Insurers’ Financial Leverage and Debt-Servicing Capacity
In this report, Fitch Ratings analyzes key holding company financial factors of property/casualty insurance organizations, examining changes in traditional financial leverage and interest coverage measures. Fitch Ratings also evaluates insurers’ liquidity from insurance subsidiary dividend capacity. The report compiles 10-K filing data from all publicly traded property/casualty insurers in the agency’s debt-rating universe.
Financial Guaranty — Revisited
Fitch Ratings has received various inquiries to review start-up financial guarantors following the February 2010 withdrawal of its outstanding ratings in the financial guaranty industry. This report introduces principles that the agency would consider in formulating future criteria to rate financial guarantors. Prior to developing formal criteria and assigning any new ratings, Fitch Ratings is seeking feedback from the market on its views of the industry and these rating principles. As certain inherent risks can not be fully mitigated, including very high operating leverage to earn acceptable returns, tail event susceptibility, limited financial flexibility under stress, Fitch Ratings believes that the natural ratings range for financial guarantor Insurer Financial Strength (IFS) ratings are within the ‘A’ category.
Title Insurance Industry 2010 Financial Results
In this report, Fitch Ratings reviews 2010 GAAP financial results of the U.S. Title Insurance Industry. Profitability for the title insurance industry improved in 2010 compared to 2009. The five publicly traded title insurance underwriters, which account for greater than 90% of total industry revenue, reported an underwriting profit for the second consecutive year in 2010. Despite reduced operating revenue, continued expense reductions and stable loss costs led to improved profit margins. Still operating performance remains considerably weaker than the strong profits reported from 2004 to 2007 and the industry continues to face headwinds. Mortgage originations are expected to plunge in 2011 and refinancing activity will likely stall given rising interest rates, pressuring revenues and profit margins.
QIS5 – Insurers’ Capital Solid; Non-Life and Small Niche Players Disadvantaged
The impact of Solvency II on insurers’ capital position was clarified by published results of the fifth Quantitative Impact Study (QIS5) by the European Insurance and Occupational Pensions Authority (EIOPA). Solvency II will come into effect on January 1, 2013. Fitch Ratings’ analysis suggests that the impact of the new Solvency II regulatory regime on insurers’ capital positions may not be as severe as the industry originally feared. The agency maintains its view that Solvency II will be broadly ratings-neutral across its portfolio of rated European insurers and reinsurers. Still, some non-life insurers may have to recapitalize or reshape their business unless the Solvency II risk charges for non-life underwriting and catastrophe risk are recalibrated.
Company Research Highlights
- CNA Financial Corporation (And Insurance Subsidiaries)
- Factory Mutual Insurance Company (And Its Subsidiaries)
- FPIC Insurance Group, Inc.
- Nationwide Financial Services, Inc. (And Insurance Operating Subsidiaries)
- Prudential Financial, Inc. (and Subsidiaries)
- Reinsurance Group of America (and Subsidiary)
- Unum Group, Inc.
New Criteria
On March 31, Fitch Ratings released updates to a number of insurance criteria pieces, including the Master Rating Methodology; criteria related to major subsectors, including Life and Non-Life insurance; and the global notching and recovery rating methodology.