S&P concerned over capital levels of global multiline insurers

S&P has flagged capital adequacy as a rating weakness for many of the GMIs covered in its ‘Sovereign Exposure And Market Volatility Could Pose Heightened Threat To Ratings On Global Multiline Insurers’ report, particularly as investment markets are once again in turmoil.

“However, our concerns are tempered by our positive views about their broad geographic spread and asset and liability diversification,” added S&P’s credit analyst Lotfi Elbarhdadi.

The rating agency said it is looking closely at the ability of management teams to weather stormy markets through efficient enterprise risk management and adequate management actions.

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Besides lower equity prices, widening credit spreads and decreasing interest rates, which are dampening investment returns, are weighing on insurers earnings, said S&P.

Falling stock prices for the GMIs and widening credit spreads is further constraining their financial flexibility, it added.

“The substantial exposure of GMI’s fixed-income portfolios to sovereign bonds and banks in general makes them vulnerable to the consequences of any turn for the worse,” explained S&P. “This could also pressure the ratings, depending on the size of a particular GMI’s exposure.”

However the diversified and strong credit quality investment portfolios of GMI’s, as reflected by their on average strong credit ratings, means that S&P has not carried out any negative rating action on a GMI on the back of the recent downgrades of the US and Italy. The ratings have also held up well after the downgrades of Greece, Ireland, and Portugal.

“Under our criteria, we believe that relatively deficient capital adequacy is likely to become an increasing source of pressure on ratings. Our rating analysis factors in, however, earning generation abilities and actions that management may take to preserve capital,” said S&P.

“We continue to view capital adequacy as a rating weakness to varying degrees for many of the Europe-based GMIs covered in this report. Current market conditions have, we believe, largely erased the improvement in GMI’s risk-adjusted solvency ratios in the first half of 2011. These market trends are also likely to put an even greater drag on GMI’s efforts to rebuild capital adequacy through earnings generation, in our opinion,” it concluded.