New York City-based ratings agency Fitch Ratings said the level of total financing and commitments has become a key indicator of capitalization in its analysis of North American insurance companies as funding sources and access to capital markets have varied, according to a report it published Tuesday.
Fitch said the total financing and commitments (TFC) ratio year-end 2014 average for North American insurers in Fitch's coverage universe is 0.49x, using shareholders' equity adjusted for financial accounting standards. This is at the low end of Fitch's “medium” (0.4x-0.8x) level guideline.
At this level, Fitch said it believes that TFC ratios are neutral to ratings. However, approximately 45% of the industry's TFC ratio is derived from nontraditional financial leverage, illustrating that the industry may be more exposed to financing and capital markets' funding risks than investors realize, the ratings agency said.
Fitch said the TFC ratio is its comprehensive nonrisk-based leverage measure for an insurance organization. TFC covers financial debt and operating debt, as well as other off-balance sheet exposures and debt-like commitments. This includes securitizations, lines of credit used for third-party collateral, securities lending, Federal Home Loan Bank borrowings, debt guarantees and derivative obligations, such as credit default swaps.
The ratings agency said it considers the TFC ratio a key trigger for a rating downgrade or upgrade in cases where insurers have relatively high TFC levels. A high dependence on financing and commitments can be a direct source of vulnerability to an insurer in a stress scenario, Fitch said.
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