Private ownership of life re/insurers may affect credit ratings, says Fitch
Private ownership could affect an insurance company's credit rating with a focus on short term gains among the biggest risks, Fitch Ratings has warned.
In a commentary this week, Fitch said the credit impact of private ownership on an insurer hinges on the owner’s strategy, including influence on the insurer’s business plans, investments, capital management and dividends.
Fitch issued the commentary in the wake of Zurich Insurance's January decision to call of the sale of a book of life policies to German consolidator Viridium, majority-owned by a private equity firm.
But the issue has been in the spotlight for longer, with the International Monetary Fund's flagging of the vulnerabilities of privately owned life insurers in its October 2023 Global Financial Stability Report, citing their exposure to illiquid investments, sometimes controlled by the private equity firms themselves.
The IMF reported particularly noted the growth of the life re/insurance sector in Bermuda, which now manages $1 trillion of assets - 4% of the global pension market.
"Some private equity firms may prioritise short-term gains for shareholders over longer-term considerations for policyholders and debt holders," Fitch said. "This may result in riskier business and investment strategies for the insurers they own, and aggressive extraction of capital, which is credit negative.
"In addition, financial disclosures tend to be less transparent due to the lack of public reporting requirements."
Fitch said that in "developed markets", regulatory oversight significantly limits the risks that are often associated with privately owned insurers.
"In most cases, regulatory approval is required for a change of ownership or senior management, and privately owned insurers are subject to the same regulation as publicly owned insurers, including scrutiny of governance and risk management frameworks," the ratings agency said.
But it added: "Private ownership is not, in itself, automatically credit negative for insurers. We assess each case on its own merits in accordance with our Insurance Rating Criteria. For ownership to potentially influence the insurer’s ratings, the owner has to exercise control, as is usually the case with 100% ownership or if there are very strong operational, governance or financial ties.
"Private ownership may be negative for the ratings if the owner has weaker credit quality than the insurer or is likely to govern in an adverse manner. Conversely, if the owner has stronger credit quality and is likely to be supportive, the ownership may be positive for the ratings."
In assessing the credit implications of private ownership, we focus, in particular, on the owner’s influence on the insurer’s business plans, investment and capital management strategies, and policies for shareholder dividends and capital returns. For example, rapid growth through aggressive sales could increase reputational and regulatory risks, while underpricing to gain market share could lead to financial losses. A riskier investment strategy in pursuit of higher returns could also be credit negative. Capital management is among the most important considerations, given the prevalence of private equity firms focused on short-term gains for shareholders."
Fitch said that when the Zurich-Viridium transaction was called off, Viridium cited its ownership structure as a factor in the decision.
"Viridium is majority owned by Cinven, a UK private equity firm. Cinven also owned the Italian life insurer Eurovita, whose policies were transferred to a newly established entity owned by several other insurers following a capital shortfall and intervention by the Italian insurance regulator last year."
AM Best this week downgraded the ratings of Bermuda-based life re/insurer 777 Re for a second time in six months, citing its holdings of illiquid investments, some of which were invested in holdings of its ultimate parent, 777 Partners.
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