Initial portfolio review will focus on ratings that are considered most vulnerable to a negative rating action
Chicago-07 April 2020 — Fitch Ratings announced today the key ratings assumptions it will use in conducting upcoming reviews of insurance company ratings in light of the risks and uncertainties related to the global coronavirus pandemic. Fitch’s plan is to review the international ratings of all of the insurance companies in the agency’s coverage globally within the next four to five weeks. Reviews will then be ongoing as new information becomes available.
The coronavirus-related reviews were originally announced by Fitch in several published commentaries over the past several weeks in which the agency revised its sector outlook for all insurance company sectors/regions globally to negative. Fitch also revised its Rating Outlooks to Negative for the life sectors in the U.S., EMEA and APAC, and U.S. health insurance sector. A negative sector outlook implies adverse pressure on industry fundamentals. A Negative Rating Outlook implies that fundamental pressures are significant enough that a notable portion of ratings are expected to be negatively impacted.
The assumptions below are being used by Fitch to develop pro forma financial metrics for each of the insurance companies it rates. Fitch will compare the pro forma metrics to both ratings guidelines defined in its Insurance Rating Criteria, and relative to previously established rating sensitivities for each company. Fitch expects to take negative rating actions in cases when pro forma results fall outside prior rating sensitivities or criteria guidelines.
Assumptions for coronavirus Insurance Reviews (Rating Case):
- Decline in key stock market indices by 35% relative to Jan. 1, 2020.
- Increase in two-year cumulative high yield bond default rate to 16% in the U.S. and 13% in Europe. Assumptions for other countries will fall within these ranges. The default rate assumptions will be applied to current non-investment grade assets, as well as a portion of ‘BBB’ assets.
- Both upward and downward pressure on interest rates, with spreads widening (including high yield by 400 basis points) coupled with notable declines in government rates.
- Capital markets access is limited for issuers at senior debt levels of ‘BBB’ and below.
- A COVID-19 infection rate of 5% and a mortality rate (as a percent of infected) of 1%.
- For the non-life and reinsurance sectors, a negative impact on the industry-level accident year loss ratio from COVID-19-related claims at 3.5 percentage points, partially offset by a favorable impact from the auto line averaging 1.5 percentage points.
Other bespoke assumptions for certain insurance companies may also be used for key risks not captured above. These will be set at a similar level of conservatism used for the above assumptions, and will be discussed in the ratings announcements for those companies.
The portfolio review will be conducted in phases. The initial phase will focus on ratings that are considered most vulnerable to a negative rating action, which will include, but will not be limited to, insurers whose Rating Outlook is currently Negative. The coronavirus assumptions will also be applied to any company whose rating is due for a routine annual review as defined in Fitch policies.
Fitch notes that periodic updates to its assumptions are possible given the rapid changes in government actions in response to the pandemic, and the pace with which new information is available on the medical aspects of the outbreak.
In addition to the Rating Case, Fitch has also developed Stress Case assumptions in support of its coronavirus reviews. The Stress Case will not act as a driver of rating actions, but instead will be an aid in the development of rating sensitivities. The Stress Case results will be discussed in the commentaries that Fitch publishes on each insurance company as it completes its ratings reviews.