Fitch Ratings Insurance Insights — December 2012 Edition

Below is the December 2012 edition of Fitch Ratings’ Insurance Insights:

The Insurance Insights newsletter provides a monthly round up of Fitch Ratings’ special reports, industry trends and company research for the insurance markets. For comprehensive coverage of the insurance sector as it’s published, please regularly check our website for updates.

Featured Reports

Asbestos Losses: Continued Source of Reserve Deficiency  
Fitch Ratings estimates industry asbestos reserves to be deficient by $2 billion to $8 billion at year-end 2011. Asbestos reserves make up approximately 4% of total property/casualty industry reserves with approximately 50% of reserves concentrated in five insurers. Fitch Ratings examines a range of loss scenarios and future payments for asbestos losses up to an ultimate industry loss of $85 billion. Based on recent development experience and its latest analysis of loss payment scenarios, the agency’s target industry survival ratio is 11x-14x. The reported industry survival ratio for asbestos liabilities increased modestly to 10.3x in 2011 from 10.1x in 2010 and 9.9x in 2009, indicating that incurred losses have expanded at a faster rate than paid losses in recent years.
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U.S. Life Insurance Sector Credit Factors
Fitch Ratings issued a sector-specific special report describing the credit factors the agency uses to analyze the U.S. Life Insurance Sector. These sector-specific credit factors supplement the global master criteria ‘Insurance Rating Methodology’, which details key elements of criteria that influence Fitch Ratings’ core fundamental credit analysis of insurance companies and groups. Key life insurance industry risk factors include investment risk tied to fixed income and equity holdings, margin pressures due to macroeconomic headwinds and intense price competition, asset/liability and liquidity management, and evolving regulatory, tax and accounting frameworks.
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Risk Avoidance Driving Reinsurers’ Investment Strategy
Fitch Ratings expects reinsurers to continue to abide by their core investment principles in the face of a possibly protracted low-yielding investment environment. Nevertheless, some smaller reinsurers prefer to keep asset duration to a minimum (of about one year) as they seek to reduce the balance-sheet (solvency) shock which could occur when interest rates rise, while also providing the opportunity to reinvest earlier at higher interest rates. Fitch Ratings also expects reinsurers to remain focused on maintaining sufficient liquidity to meet and settle liabilities in a timely manner, and avoiding excessive balance sheet volatility. The agency regards direct exposure to the eurozone debt crisis as manageable overall for reinsurers, although contagion would be a concern.
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Property/Casualty Insurer Municipal Securities Investments
Fitch Ratings examines insurers’ municipal bond holdings, comparing the composition, credit quality, and market value of those with the largest allocation to this asset class. Municipal bonds represented 31% of U.S. property/casualty insurer invested assets at year-end 2011. The attraction to municipal bonds is attributable to their historically low default experience, more predictable returns, and tax-advantaged features that appeal to insurers with larger underwriting profits. Recent fiscal troubles of individual state and local government entities, including the bankruptcy filings of three California cities, raise concerns over the quality of municipal bonds. Overall, the industry’s municipal bond portfolio continues to be well diversified with a greater emphasis on revenue bonds.
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