How a change in group strategy can trigger individual carrier rating downgrades and how to manage the risk.

Unexpected rating downgrades are a concern for policyholders and brokers alike. This is especially true when material downgrades happen even though the rated carrier’s stand-alone profile is unchanged, for example as the result of a change in ownership or in a parent group’s strategy.

Last September, S&P downgraded Aviva’s French subsidiaries from the group level of ‘AA-’ to ‘A+’ with a negative ‘CreditWatch’, and at the end of February from ‘A+’ to ‘A’ (and still on negative watch). While ‘A’ is still a healthy rating, for policyholders it represents a material change.

These downgrades did not appear to reflect any worsening of the credit quality of the subsidiaries themselves, but instead derived from the strategic shift at Aviva that led to the sale of its French operations. In the past, the Aviva France ratings had reflected the ‘AA-‘ rating of the Aviva Group.

For many ratings users, carrier selection by rating grade is a fundamental issue, with a rating from a recognised rating agency at or above a given level being a must-have.

One challenge is that many carriers are part of a larger group, and commonly assigned the ‘group level’ rating due to the fact they are, to use S&P jargon, considered ‘core’ by the rating agency.

Without a binding guarantee or other explicit support, the major rating agencies’ criteria for assessing ‘core’ status is largely qualitative and covers a range of analytical issues. Of these, arguably the most challenging for the agencies is the long-term, strategic commitment to whatever business lines and/or geographies the carrier covers.

Aviva’s strategic view changed, it decided to exit France and, suddenly, its French subsidiaries were no longer carrying the group’s S&P ‘AA-‘ rating.

We see this type of strategic decision making as the most likely source of potential concern for policyholders and brokers when using carriers whose rating is a function of their parent group.

For Brokers this seems to us to be a pretty important consideration to be aware of when using ratings, especially in longer tail lines. Changes in strategy are a fact of life, but a rating agency cannot always see that coming well in advance – despite the detailed and confidential discussions they have with the leaderships of rated groups. Especially when that decision follows a change in leadership.

We work with a number of global insurers and brokers who, while placing considerable weight on ratings, nonetheless also consider individual carriers on their own financial strength merits (both for ‘business as usual’ reviews and stress testing). This isn’t to second guess the rating, but rather to understand the potential consequences in the event that, for whatever reason, any group support reflected in the rating were to be weakened or withdrawn.

Litmus Analysis Limited – May 2021

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