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Asset stress main driver for rating downturns: Fitch

30th June 2020 - Author: Matt Sheehan

Following a review of the impact of COVID-19 on North American re/insurers, Fitch Ratings has determined that asset stress has contributed the most to its recent negative rating outlook changes.

Fitch-RatingsFitch reviewed its entire portfolio of rated North American insurers over the last couple of months, and took rating actions on all 99 groups in its coverage universe.

The bulk of these actions were affirmations with a stable outlook at 75%, followed by affirmations with a negative outlook at 19%, downgrades at 3% and rating watches at 3%.

Of the major insurance sectors, the life insurance sector with its high asset leverage fared the worst in Fitch’s stress analysis.

Health insurers performed better in the stress than originally expected due to the suspension of many medical procedures and a reduction of in-office visits.

Property and casualty, meanwhile, performed the best due to low asset leverage and lower noN-covid-19 claims from reduced economic activity and stay-at-home orders.

“The primary credit concern for U.S. life insurers is asset losses tied to credit bond/loan impairments and equity investment value declines from a sustained disruption in the broader economy and financial markets,” said Julie Burke, Managing Director and head of North American Insurance at Fitch Ratings.

“Asset losses are likely to be more far-reaching than previous recessions and we’ve adjusted our assumptions accordingly,” she added.

Compared with the financial crisis, Fitch noted that exposure to corporate credit within life insurers’ current investment portfolios reflects higher allocation to bonds rated ‘BBB’, which are vulnerable to rating migration, but lower allocation to below-investment-grade-corporates.

While certain industry sectors are particularly stressed during this credit downturn, including travel, leisure, entertainment and energy, the life insurance industry’s exposure to these troubled sectors is limited.

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