From the April 2009 issue of Investment Advisor • Subscribe!

April 1, 2009

The Outlook: Negative, but Sound

In the second half of 2008, Fitch Ratings moved its ratings outlook for most insurance regions and sectors globally to negative. It now expects a heightened level of downward rating activity in the near term, although according to Douglas Meyer, managing director and insurance analyst at Fitch, "for the most part, the change in ratings . . . will largely be limited to one, maybe two, notches." Overall, he says, Fitch believes the industry is "very sound."

Fitch sees the potential for negative impact on more than half of its rated universe. Citing factors such as "heightened earnings volatility, reduced investment portfolio liquidity and quality, and material declines in book capital," the company expects significant pressures on insurers throughout the current economic climate.

Estimated loss factors and different forms of pro forma risk-based capital modeling make up some of the criteria for its outlook, as well as liquidity and "idiosyncratic risks that may exist in ancillary businesses or linked to risk concentrations."

However, if bailout money comes along, Fitch theorizes that downward ratings actions may be tempered. In addition, other mitigating factors are being considered, from hedging strategies to reinsurance to policyholder dividend adjustments.

The company has released a special report on how it is applying its rating criteria in the "current recessionary climate." The report, titled Insurance Ratings Criteria: Application in a Stressful Environment, is available online at www.fitchratings.com.

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