Moody’s Investors Service has announced updated methodologies for rating life insurers, property and casualty insurers and reinsurers. It is the second time in under six months it has done so, with the new documents replacing methodologies published in August 2022. An updated trade credit insurers methodology, meanwhile, replaces a version published in November 2019.
The revised versions have added a section on “Consideration of Accounting Changes: IFRS-17 and US GAAP LDTI” in the “Scorecard Framework” sub-sections. They make clear that Moody’s may adjust factor scores due to these accounting changes.
A full explanation of the reinsurers and other methodologies can be found on the website.
“Insurers reporting under IFRS or US GAAP may be subject to IFRS 17 or long duration targeted improvements (LDTI) under US Generally Accepted Accounting Principles (US GAAP), respectively, depending on the jurisdiction in which an insurance company reports,” the new section reads.
“The application of IFRS 17 or LDTI may significantly affect the overall presentation of financial statements as well as certain reported amounts, some of which are inputs to scorecard metrics. These inputs include shareholders’ equity, insurance liabilities, revenue and net income,” it continues.
“Scorecard metrics whose inputs are affected by the application of IFRS 17 or LDTI may result in values and unadjusted scores that are significantly different from what would have otherwise resulted. The application of the new accounting standards are not expected to directly affect the underlying economic risk or expected cash flows of in-force business. In addition, for most regulatory jurisdictions, the standards do not directly affect regulatory financial reporting and regulatory capital.”
“Thus, qualitative adjustments to factor scores of affected metrics will, for a period of time, be particularly important for certain insurance companies, due to limited comparability with prior accounting periods or with insurers that follow different accounting standards. These adjustments fall within the scope of our overall approach to analyzing reinsurers where we may adjust factor scores to reflect our analytical perspective of credit risk.”
The section also notes that the rating agency may consider supplemental metrics, including metrics calculated or estimated from financial statements. “For instance, we may place greater emphasis on leverage excluding accumulated other comprehensive income (AOCI) in assessing financial flexibility and on regulatory capital levels (eg Solvency II) in assessing capital adequacy,” it adds.
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