Fitch Ratings has published a special report detailing the background and rating rationale of the insurance stress test on its European rated portfolio.
Fitch undertook a series of stress tests on its European rated portfolio, and concluded that some insurers' large investment concentrations in sovereign and bank debt justify being distinguished from those of similarly rated peers. The stress test assessed the degree of sensitivity of the insurers' capital adequacy to the "extreme case" of a haircut of 25% in their holdings of peripheral eurozone government and bank debt.
Ratings were downgraded in cases when the pro forma impact on the variability of capital was more severe than Fitch viewed as reasonable for the rating category. Final ratings also considered, as appropriate, other fundamental characteristics of a given issuer, both positive and negative. Fitch downgraded several Italian and Spanish insurers (see 'Fitch Takes Rating Actions on Italian and Spanish Insurers', dated 13 December 2011, at www.fitchratings.com) due to their performance in the stress tests, but concluded that no further rating actions on European insurers were warranted as a direct result of its most recent eurozone stress test analysis (see 'Fitch: No Further Rating Actions on European Insurers from Stress Tests', dated 27 January 2012, at www.fitchratings.com).
Fitch notes that while it has concluded its current stress test review, if FYE11 reporting indicates that the level of exposure to these securities has grown materially higher than Fitch's expectations for any given company, Fitch would expect to re-run the stress test for such companies and take any indicated rating actions. In addition, if there are significant adverse developments either for individual insurers or at the capital market level, Fitch will incorporate them in an updated stress analysis and take rating actions as appropriate.
Conversely, if capital market conditions improve and the outlook for sovereign debt stabilises, it is possible that some of the recently downgraded insurers' ratings could be upgraded if their actual and pro-forma capital ratios also improve.
The special report "Eurozone Sovereign Risks - Impact on Insurers. Stress Test: Background and Rationale for Rating Actions" is available at www.fitchratings.com.
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