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Financial Planning > Behavioral Finance

A silver lining in a G-SII label?

By Elizabeth D. Festa

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The benefits to credit ratings of being an insurer designated a global systemically important insurer (G-SII) by the G-20’s Financial Stability Board (FSB) outweigh the drawbacks, according to a Moody’s Investor Service credit analysis report.

Moody’s disclosed its stamp of approval on the G-SII designations in a late July release of its “Credit Outlook,” which focuses on credit implications of current events.

But all is not wine and roses for these insurers, as they themselves — and their U.S. regulators — worry.
 

The positive credit implications stem from the potential for these designated insurers to play it safer than most, and to be less likely to take actions that would damage their credit quality, according to the report, written by Laura Perez Martinez, a Moody’s credit analyst. 

The G-SIIs include large American companies and some European companies with big U.S. operations, such as American International Group, Inc. (AIG, rated Baa1 stable), Aviva Plc ((P)A3 stable), AXA (A2 negative), MetLife Inc. (A3 negative), Prudential Financial Inc. (Baa1 stable) and the UK’s  Prudential Public Limited Company (A2 stable).  

The FSB, which made its first round of annual determinations public July 18, recommends that these insurers have additional regulatory oversight related to enhanced group-wide supervision and higher capital requirements. It is up to the home countries to implement the measures, crafted by the International Association of Insurance Supervisors (IAIS).  

The requirements would be phased in, beginning in 2015, for the higher loss absorbency capital requirement, including top-quality capital needed to cushion financial activities and products deemed to be nontraditional insurance, such as variable annuities, or not insurance at all, such as derivatives hedging. 

However, the positive credit implications for G-SIIs are muted somewhat, Moody’s said, by any lack of flexibility the insurers will be subject to under the recommended requirement restraints, hampering their ability to be nimble and independent enough to diversify their earnings and attract investors. 

“In particular, the forthcoming capital surcharge could make G-SIIs less competitive than those not designated as G-SIIs because they would need to raise prices to achieve current return targets,” Martinez said. “Such lower returns could also affect G-SIIs’ ability to raise capital if investors find them less attractive relative to peers unburdened by the FSB’s supervision,” she stated in her report.

Moody’s has also said that the U.S. domestic designations for insurers that are systemically important financial institutions (SIFIs) is a credit positive.

In June, the U.S. Financial Stability Oversight Council (FSOC) named Prudential Financial (U.S.) and AIG, along with General Electric Capital Corporation (GECC, A1 stable) as nonbank SIFIs.

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