S&P’s gauges impact of temporary and non-temporary unrealized losses

Standard & Poor’s has distinguished between other-than-temporary-impairments (OTTI) and fixed maturity portfolios when gauging the potential impact of unrealized losses on insurers’ financial and credit ratings.The recognition of OTTIs is more likely to signal a true economic loss and result in negative rating actions, the ratings agency notes. On the other hand, in fixed-maturity portfolios, the potential for unrealized losses to evolve into real economic losses is not as clear, and S&P’s may not consider it in its analysis. With OTTIs, the financial reporting process requires that insurers assess their investment portfolio on a security-by-security basis to determine when the fair value of the investment is not likely to recover fully before the expected sale or maturity, S&P’s says.When a company recognizes an impairment loss, it accounts for the investment by taking a realized loss, reducing the book value to the fair value on the date of the reported financials, S&P’s says. “Realized losses from asset sales constitute a true economic loss, and in our view, the recognition of an OTTI strongly signals the likelihood of economic losses,” S&P’s says. “The presence of either could result in negative rating actions, depending on the size of these losses or OTTI related to earnings, capital and our expectations.”With fixed maturity portfolios, if S&P’s deems the impairment likely to be temporary and an insurer is able to hold the securities to full recovery, “the reported unrealized loss might not reflect economic reality,” S&P’s says.”As a result, our analysis might either heavily discount or eliminate it.”