Reinsurer's are shifting their focus from maintaining credit ratings to shareholder satisfaction, according to Moody's

Reinsurers' focus on attaining the highest possible credit rating is waning, according to Moody’s.

Speaking at Moody’s Global Insurance Conference in London this week, senior credit officer Timour Boudkeev explained how shareholders were losing interest in maintaining the highest credit ratings.

“In the past, a ‘Aaa’ rating was a matter of pride and a core operating objective for leading European insurers,” he said. “However today the economic cost of maintaining a ‘Aaa’ rating is frequently viewed as an extravagant expense for shareholders.”

Coupled with this, he went on, managements are no longer interested in the highest possible rating. Rather, in fact, the focus is now on remaining in line with peers.

Boudkeev explained that high pressure from shareholders was behind not only the shift in focus on ratings, but also account for the “unprecedentedly high share buybacks” by European insurers and reinsurers.

He explained that “low growth results in an increased focus on margins and balance sheet de-risking,” therefore eventually leading to “higher margins and limited growth opportunities which increase the scope for shareholder distributions.”

“The economic cost of maintaining a Aaa rating is frequently viewed as an extravagant expense for shareholders

Moody's senior credit officer Timour Boudkeev

He called these vocal stakeholders “Activist Shareholders” and pointed out how hedge funds and private equity firms now initially purchase small stakes in firms and then go on to demand policy change.

If management is unresponsive the stake may be increased, and/or other investors may be encouraged to join in. The interests of shareholders and bondholders may not always coincide, though, particularly with regards to capital structure.

“Management and the board are therefore crucial arbiters.”

Boudkeev also used the conference to allay the fears of the insurance community regarding the current subprime mortgage crisis in the US and the resulting worldwide credit turmoil.

“We do not currently expect a major direct impact from the sub-prime crisis on European insurers,” he clearly stated.

European insurers have become increasingly conservative in their investment strategies after events such as the equity losses 2002-2004, the advent of Solvency II and general risk management.

“We do not currently expect a major direct impact from the subprime crisis on European insurers

Moody's senior credit officer Timour Boudkeev

There is limited rationale for accepting meaningful levels of US$-denominated structured credit risk and, with a few exceptions, the European insurance industry has relatively good asset quality with limited exposure to complex credit instruments (e.g. CDOs).

Boudkeev therefore surmised that second-order effects may have a more material impact on European insurers’ earnings and balance sheets.

“Insurers maintain reasonable exposure to non-subprime structured assets, lower grade fixed income securities and specifically equities,” he said.

“As substantial investors, a prolonged and material capital markets dislocation (falls in value) could damage insurers’ earnings and potentially capital bases.”

Insurers, it seems, are not out of the subprime woods yet.