A rating agency says its new Global Insurance Credit Default Swap Index shows swaps traders are skeptical about insurers’ finances.
Moody’s Investors Service, New York, says the swaps traders making the deals covered by the “MDYGIX” index seem to be about 2 to 3 rating notches more pessimistic about big insurers than Moody’s ratings are.
A credit default swap (CDS) is an arrangement that parties can use to make trades based on the estimated risk that an issuer of debt will default. In the case of a loan default, the buyer of the CDS can “swap” the defaulted loan for the face value of the loan.
Holders of debt may use swaps to protect against the risk of default. Traders — who help provide the protection for the debt holders — speculate on whether issuers can keep up payments. The CDS transactions included in the new Moody’s insurance CDS index reflect traders’ views on insurers’ financial strength.
The Global Insurance CDS Index includes 32 companies in the life insurance, property-casualty insurance and reinsurance sectors. To be included in the index, a company must have high quality data in the CDS market. Moody’s set that requirement to avoid letting a company with low-quality CDS data distort the index, the company says.
Wider spreads mean that valuations are falling and that investors are more worried about the risk of default; narrower spreads mean that valuations are rising and that investors are feeling more confident.
Moody’s has given the companies on the index an average rating of about A3; the index itself suggests swaps traders are giving the companies an average rating of Baa3.
The index seems to show that traders are more worried about the European companies on the index than the U.S. companies, possibly because of concerns about the European companies’ greater exposure to sovereign debt and bank debt in European countries that have been facing serious debt problems, Moody’s says.