Credit impact of private ownership on insurers 'hinges on strategy' says Fitch

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 Ratings said in a briefing note on 14 February. 

Fitch said private ownership of insurers has been in the spotlight in Europe after Zurich’s plan to sell a book of life policies to German consolidator Viridium, majority-owned by a private equity firm, was called off in January 2024.

"Some private equity firms may prioritise short-term gains for shareholders over longer-term considerations for policyholders and debt holders. 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.

"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."

Fitch continued that 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 further highlighted how the IMF flagged 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 – a notable theme in the US life sector.

"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."