OREANDA-NEWS. Fitch Ratings has finalized new notching criteria to be used for insurance industry ratings globally. The new notching criteria can be found in Section VI. of an update to Fitch's insurance master criteria report titled 'Insurance Rating Methodology' which was published today. Fitch published proposed changes to its notching criteria on May 12, 2015 in the report 'Exposure Draft: Insurance Notching Criteria'.

BACKGROUND
Notching refers to the practice of establishing a given rating relative to a defined 'anchor' rating, using guidelines linked to certain characteristics of the rating that is being notched. For Fitch's insurance ratings, the Insurer Financial Strength (IFS) rating is the initial anchor rating, and other ratings that are notched relative to it include Issuer Default Ratings (IDRs) of operating and holding companies, and debt/hybrid obligation ratings.

No changes were made to the proposed criteria following a market consultation period which ended on June 19, 2015. Fitch received one formal, written comment on the proposed criteria during the market consultation period, from a source requesting confidential treatment. The comment did not focus on core aspects of the notching criteria, but rather on a suggested change to Fitch's calculation of its Fixed Charge Coverage Ratio. Fitch will consider this suggestion as part of its routine annual review of its master criteria scheduled for later this year.

Informal discussions with numerous market participants during the consultation period indicated broad support of Fitch's proposals.

APPLICATION
The new notching criteria will be applied to any existing or new ratings for any rating committee reviews held from this point forward. This will include any annual or interim rating committees on individual rated entities or insurance groups that would otherwise be routinely scheduled by Fitch as part of its ongoing ratings process. It will also include a series of 'portfolio review committees', whose sole focus will be to apply the new notching criteria to existing ratings. Portfolio review committees will encompass a grouping of rated entities within a given region/sector.

Fitch expects to complete all such portfolio review committees by Aug. 31, 2015, implying that all existing ratings will be updated to reflect the new notching criteria by that date.

RATING IMPACT
As noted in the May 12, 2015 exposure draft, Fitch originally expected the new criteria to result in an upgrade in approximately 45% of its 320 existing hybrid instrument ratings, an upgrade in 4% of approximately 300 IFS ratings of insurance groups, and a downgrade in 21% of approximately 45 classes of operating company debt. In addition, Fitch expected that of approximately 120 IDRs of insurance holding companies, 20% would be upgraded, and that of approximately 90 classes of holding company debt, 6% would be upgraded and 5% would be downgraded. Most rating changes will be one notch.

The above noted ratings expectations continue to hold true, with the exception that the number of hybrid upgrades will be lower than prior expectations, likely in the range of 25%-30%. This follows discussions with various market participants in Europe during the consultation period, and their feedback it is likely regulatory interpretations of certain capital triggers referenced within many legacy hybrids will be more conservative than originally expected by Fitch. This will cause Fitch to assess higher non-performance risk than originally envisioned under its new criteria.

Fitch has updated its notching criteria in light of changes in the regulatory landscape, including the movement in Europe and other jurisdictions to Solvency 2 or a Solvency 2-type regulatory framework. As a result, notching changes will be more pronounced in Europe and other such jurisdictions, and more limited in the U.S. and similarly regulated countries.