Moody’s Investors Service has published updated methodologies for rating life insurers, property and casualty insurers, reinsurers and trade credit insurers, replacing the versions published last year.
According to Moody’s adjusted rating methodologies, insurers reporting under IFRS or US GAAP may be subject to IFRS 17 or long duration targeted improvements (LDTI) under US Generally Accepted Accounting Principles (US GAAP), respectively, depending on the jurisdiction in which an insurance company reports.
Moody’s suggests that the application of IFRS 17 or LDTI may significantly affect the overall presentation of financial statements and certain reported amounts, some of which are inputs to scorecard metrics.
These inputs include shareholders’ equity, insurance liabilities, revenue and net income.
As such, Moody’s notes that scorecard metrics whose inputs are affected by the application of IFRS 17 or LDTI may result in values and unadjusted scores that are significantly different from what would have otherwise resulted.
Meanwhile, Moody’s does not expect the application of the new accounting standards to directly affect the underlying economic risk or expected cash flows of in-force business. It adds that the new standards do not directly affect regulatory financial reporting and regulatory capital for most regulatory jurisdictions.
Moody’s says that qualitative adjustments to factor scores of affected metrics will be important for certain insurance companies, due to limited comparability with prior accounting periods or with insurers that follow different accounting standards.
It writes, “These adjustments fall within the scope of our overall approach to analyzing reinsurers where we may adjust factor scores to reflect our analytical perspective of credit risk.”
“We may consider supplemental metrics in our analysis, including metrics calculated or estimated from financial statements. For instance, we may place greater emphasis on leverage excluding accumulated other comprehensive income (AOCI) in assessing financial flexibility and on regulatory capital levels (e.g., Solvency II) in assessing capital adequacy.”
The rating agency continues, “To arrive at the standalone credit profile for the analytic unit, we may assess the company’s management, governance, risk management, accounting policy and disclosures, sovereign and regulatory environment as well as any special rating situations.
“To move from the standalone credit profile to the rating, we consider any explicit or implicit support from affiliates, as well as other rating considerations.”
