Fitch Publishes Exposure Draft of Updated Insurance Notching Criteria

CHICAGO & LONDON--(BUSINESS WIRE)-- Fitch Ratings has published an exposure draft of a proposed update to its criteria for notching in the Global Insurance sector entitled 'Exposure Draft: Insurance Notching Criteria.' Market participants may provide comments to Fitch during a consultation period that ends on June 19, 2015.

'Notching' refers to the practice of establishing a given rating relative to a defined anchor rating, using guidelines linked to certain characteristics of the rating being notched. Ratings of debt and hybrid instruments are typically notched relative to the Issuer Default Rating (IDR) based on their recovery and/or non-performance characteristics. Holding company IDRs are typically notched relative to subsidiary operating company IDRs, based on relative default risks. As proposed, the Insurer Financial Strength (IFS) rating of the operating companies acts as the initial anchor in the notching exercise.

Changes to Insurance notching criteria are being proposed in light of changes in the regulatory landscape for the global insurance industry. The proposed criteria employs a revised approach to notching in jurisdictions migrating to Solvency 2-style group regulation, whereas notching will remain more aligned with our historical approach in jurisdictions, such as the U.S., where the insurance regulatory approach has not significantly changed. As a result, notching practices will become more varied geographically than in the past due to perceived regulatory differences.

The proposals, if enacted, are expected to result in numerous rating changes, especially in jurisdictions outside of the U.S. However, a vast majority of any noted rating changes will be limited to one notch.

Hybrid instrument ratings will be most impacted. Based on the agency's preliminary analysis, of approximately 320 hybrid instrument ratings globally, Fitch expects 45% will be revised upward by one notch, 3% by two notches, and 2% will be downwardly revised by one or two notches. Most hybrid ratings of European, Asia-Pacific, Canadian and Bermudan issuers will be revised, whereas most hybrid ratings of U.S. issuers will be unchanged.

At the operating company level, of approximately 300 international-scale IFS ratings of insurance groups globally, Fitch expects 4% will be upwardly revised by one notch, and none will be lowered. Of approximately 45 classes of operating company debt rated globally, Fitch expects 21% to be downwardly revised by one notch.

At the holding company level, of approximately 120 IDRs globally, Fitch expects 20% will be revised upward by one notch, mainly in Europe (where approximately two-thirds of holding company IDRs are expected to be upwardly revised). Of approximately 90 classes of holding company debt rated globally, approximately 6% will be revised upward by one notch, and 5% will be revised downward by one notch.

During the market consultation period, Fitch will continue to apply its current notching criteria, with one general exception. For any new ratings assigned during the consultation period (to newly rated entities or new debt or hybrid issues of currently rated entities), Fitch will typically use the proposed criteria outlined in the exposure draft if it would result in a different rating.

Comments should be directed to [email protected] by June 19, 2015. In accordance with regulatory requirements, at the end of this period Fitch will publish the results of the consultation, and the content of the written responses, unless the respondent has specifically requested confidentiality.

The proposed criteria discussed in the exposure draft will replace Section VI., pages 73-88 of Fitch's global master criteria report for Insurance ratings, 'Insurance Rating Methodology', dated Sept. 4, 2014.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research

--'Insurance Rating Methodology' (Sept. 4, 2014).

Applicable Criteria and Related Research: Exposure Draft: Insurance Notching Criteria (Proposed Methodology Changes)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865576

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

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Fitch Ratings
Keith Buckley, CFA, +1-312-368-3211
Managing Director
Global Insurance
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Chris Waterman, +11 440 20 3530 1168
Managing Director
EMEA Insurance
or
Media Relations
London
Elaine Bailey, +44 203 530 1153
[email protected]
New York
Alyssa Castelli, +1-212-908-0540
[email protected]
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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