DIMA says Irish captives should escape sovereign fall out

Fears rose in the Irish market and among foreign firms that operate Irish-based insurance operations such as captives that their operations may face downgrades as a result of sovereign rating action, despite the fact that most international companies deal chiefly in international risks and do not necessarily heavily invest in Irish government debt.

S&P for example announced towards the end of November that it had decided to downgrade Ireland’s sovereign debt rating by two notches to ‘A/A-1’ from ‘AA-/A-1+’ and placed it on CreditWatch with negative implications. The rating agency’s general policy is that financial services business cannot be rated more highly than the country in which they reside.

Shortly afterwards five Ireland-based subsidiaries of larger European insurance groups were placed on negative watch by S&P. “The heightened sovereign risk also adversely affects our view of industry risk in Ireland,” said S&P.

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The insurers placed on CreditWatch were Allianz’s Irish general insurance business and its Worldwide Care business, Aviva Insurance Europe, Irish Life Assurance and RSA Insurance Ireland.

S&P explained its action on Allianz’s Irish operations. “We lowered our ratings on the Republic of Ireland to ‘A/A-1’ from ‘AA-/A-1+’ and placed them on CreditWatch with negative implications. Under our ratings criteria, we are unable to rate subsidiaries higher than the sovereign, apart from under specific circumstances. Although we consider Allianz as strategically significant to the Allianz group, the limit which the sovereign effectively places on the rating supersedes the support so imputed to the stand-alone rating on Allianz.”

“Allianz has significant holdings of Irish government bonds. We consider that the Irish downgrade represents a weakening of the quality of Allianz’s investment portfolio and, to a lesser extent, of our view of the company’s stand-alone capitalisation. However, such a deterioration in the bond portfolio would not have triggered the rating action, were it not for the convergence of the corporate and sovereign ratings,” continued the agency.

DIMA, which has almost 70 member companies that collectively wrote more than €25bn in premium income in 2008, quickly got in touch with S&P to clarify the position on the Irish sovereign rating and its implications for international re/insurers that operate in Ireland.

It pointed out that S&P had stated in its release that insurers which it may rate above the sovereign write most of their business with policyholders outside the financial centre, hold most of their investments in a form other than local sovereign debt of that financial centre and hold most of their deposits in banks domiciled outside that financial centre.

The association stressed that the DIMA membership is engaged in international re/insurance, with a global client base. From its perspective, this would indicate that its members would probably be rated independently of the sovereign position, and therefore would hopefully not see their ratings directly impacted by any further changes to Ireland’s sovereign ratings.

DIMA said that S&P had further clarified its position by stating: “The insurers concerned are typically captive insurers of corporates based outside Ireland, captive reinsurers of insurance groups based outside Ireland, or subsidiaries of global insurance groups that conduct the majority of their EU business under an Irish license. We believe such insurers’ financial strength to be independent of the financial centre’s sovereign risk.”

Sarah Goddard, CEO of DIMA, said: “Ireland has a thriving international re/insurance market, with Dublin recognised as a leading global centre for this business. I am delighted that S&P has clarified that any sovereign rating activity will not automatically have implications for international companies located in Ireland.”