Late on Wednesday, S&P cut Ireland’s credit rating from AA- to A. On Thursday, they started poking around Ireland-based insurers, placing negative watches on several companies in common with the sovereign’s outlook.
There’s a sovereign ceiling to their ratings, basically. And the ceiling is starting to fall in. On the other hand there’s something else which is concerning here.
For example, here’s how S&P explained its caution over RSA’s Irish subsidiary (emphasis ours):
“RSA Ireland has significant holdings of Irish government bonds and deposits with Irish banks, which together comprised approximate 20% of total assets and 86% of shareholders’ funds at June 30, 2010,” said Standard & Poor’s credit analyst Tatiana Grineva. “We therefore consider that the Irish downgrade represents a weakening of the quality of RSA Ireland’s investment portfolio and capital adequacy. The heightened sovereign risk adversely affects our view of industry risk in Ireland.”
There are similar stories in S&P’s negative watch placements for Allianz and Aviva subsidiaries in Ireland. (For example, Aviva Ireland held 31 per cent of its assets in Irish government bonds or corporate deposits with Irish banks at the end of 2009, according to the ratings agency.)
All of which makes the insurers’ tale a curious part of the Ireland debt story, for a number of reasons. For a start, Ireland’s banks have been bled dry of corporate deposits over the last few months. Not only that, Irish government bonds’ problem is that institutional investors have effectively abandoned them. (Hence the appeal of using Ireland’s own national pension fund as a surrogate investor.)
There’s also an industry-wide angle here — insurers and other asset managers have had to hunt around for worthwhile assets in a global context of low yields. Some of ‘em appear to have gone to peripheral sovereign debt, a choice which would be fairly exploding right now. Do remember that this is the sector that’s been described as ‘frighteningly exposed’ to fixed income markets, by the way.
More importantly overall, insurers’ assets would be in the front line for any writedowns and restructuring of Irish government debt. Bummer.
Taken together, this all makes us wonder if insurers were already heading to the exits from the Irish brand-name.
And that, given Ireland hosts around 3 per cent of global funds by domicile, is not encouraging.
Related links:
Irish government debt needs you – FT Alphaville
Sovereign bond adventures, European insurers edition – FT Alphaville
SELL: Insurers – FT Alphaville