G-SII Designations Might Fuel Restructurings: S&P

July 23, 2013

New requirements that will be imposed on insurers that the Group of 20’s Financial Stability Board has designated to be global systemically important insurers may motivate G-SII restructurings down the road, Standard & Poor’s said in a report published on Tuesday.

Overall, the report says that long-term rating implications for the nine G-SII designees are mixed—having both positive and negative ramifications for the insurers in question.

On the plus side, requirements for G-SIIs to hold more capital and to enhance the quality of their capital instruments could have a positive ratings impact, said S&P Credit Analyst Rob Jones, in a statement about the report. But these changes could lead to a higher cost of capital, potentially impacting ratings negatively, he added.

It’s also too early to call the ratings impact of heightened regulatory oversight, he said, noting that the potential avoidance or early detection of risk suggest that more oversight could be a positive, while G-SIIs may see a negative ratings impact flowing from strategic constraints and a higher regulatory burden.

Explaining the potential for restructuring, the report notes that G-SIIs might seek to ring-fence or divest its systemically risky activities.

S&P also suggested that G-SIIs may try to exploit their new status by highlighting implied government support, potentially enhancing a G-SII’s competitive position in the eyes of its customers and investors compared with non-G-SIIs.

The report stresses, however, that S&P does not expect the new designation to actually change governments’ behavior toward G-SIIs or insurers generally. “Unlike global systemically important banks (G-SIBs), no G-SII or other insurer benefits from direct government support, other than certain government-related entities,” S&P said, noting that this distinction is reflected in S&P’s rating approach.

“We do not anticipate that governments would provide capital or liquidity to insurers since their business models do not generally involve on-demand liabilities that are akin to bank deposits. Furthermore, insurers can generally be run-off (or “resolved” in banking parlance) in an orderly fashion, whereas banks generally cannot.”

S&P believes there are only two instances where insurers may benefit indirectly from government assistance, one of which would have G-SIBs supporting core insurance subsidiaries. In addition, “governments can come to the aid of large insurers if they experience severe solvency difficulties that might otherwise disrupt the provision of insurance and have adverse social and employment consequences,” S&P said.

Separately, a day earlier, rating agency A.M. Best commented on the Financial Stability Oversight Council’s proposal that several nonbank financial institutions be designated “systemically important financial institutions,” or SIFIs.

Best said it does not expect U.S. SIFI designation to impact credit ratings, but said it is still in the process of evaluating the impact of G-SII designations.

Explaining its expectation with regard to U.S. SIFIs, Best said that its Best’s Capital Adequacy Ratio (BCAR) “generally results in a more conservative view of required capital than most regulatory tests, which are designed primarily to assess risk of insolvency.”

“Additionally, A.M. Best imposes a number of stress tests of insurers’ capital, including multiple catastrophes or various interest-rate/equity market scenarios, to determine the adequacy of capital.”

Noting that the Federal Reserve has yet to set any minimum capital requirements for SIFI’s, Managing Senior Financial Analyst Jennifer Marshall said there could be some indirect impact on ratings in a video accompanying the report. An example of an indirect impact would occur if a SIFI changes some of its investments as a result the Federal Reserve requirements, perhaps lowering investment income and profitability, she said.

Sources: Standard & Poor’s, A.M. Best