Fitch: TFC Ratio an Alternative View of Leverage for North American Insurance Companies

CHICAGO--()--The level of total financing and commitments (TFC) has become a key indicator of capitalization in Fitch Ratings' analysis of North American insurance companies, as insurers' funding sources and access to capital markets have varied, according to a Fitch report published today.

The TFC ratio is Fitch's comprehensive non-risk-based leverage measure for an insurance organization. TFC captures financial debt and operating debt, as well as various off-balance sheet exposures and debt-like commitments. This includes securitizations, LOC facilities used for third-party collateral, securities lending, Federal Home Loan Bank borrowings, debt guarantees and derivative obligations such as credit default swaps (CDS).

Fitch considers the TFC ratio as a key trigger for rating downgrade and/or upgrades in select cases of the insurers with relatively high TFC levels. High dependence on financing and commitments can be a direct source of vulnerability to an insurer in a stress scenario.

The year-end 2013 average TFC ratio for North American insurers in Fitch's coverage universe is 0.49x using adjusted shareholders' equity. This is considered at the low end of 'medium' (0.4x - 0.8x) based on Fitch's guideline. Fitch believes that this average TFC level is neutral to ratings.

However, Fitch notes that approximately 51% of TFC falls outside of traditional financial leverage, which illustrates that the industry is more exposed to financing and capital markets funding risks than many investors and counterparties may realize.

Life insurers generally have a higher TFC ratio that the property/casualty (P&C) insurance segment, due to higher financing and reserving requirements for products, and spread-lending activities. Title insurers and insurance brokers have the highest TFC values across the insurance industry.

The full report 'TFC Ratio - An Alternative View of Leverage (Year-End 2013 Results for North American Insurers)' is available at 'www.fitchratings.com.'

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

--'Total Financing and Commitment Ratio (TFC) for Insurance Organizations' (May 21, 2010).

Applicable Criteria and Related Research: TFC Ratio -- An Alternate View of Leverage (Year-End 2013 Results for North American Insurers)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=812648

Insurance Rating Methodology -- Effective Nov. 13, 2013 - Sept. 4, 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Total Financing and Commitment Ratio (TFC) for Insurance Organizations: Definition and Application

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=528708

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Contacts

Fitch Ratings
Jung Hyun Kim, CFA, KICPA, +1-212-908-0364
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10001
or
Julie A. Burke, CPA, CFA, +1-312-368-3158
Managing Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Jung Hyun Kim, CFA, KICPA, +1-212-908-0364
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10001
or
Julie A. Burke, CPA, CFA, +1-312-368-3158
Managing Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com