By Rebecca Delaney
Oct 7 - (The Insurer) - A potential sovereign downgrade of France following Prime Minister Sébastien Lecornu's resignation on Monday is unlikely to impact the financial strength ratings (FSRs) of French carriers, according to sources canvassed by The Insurer.
Lecornu resigned on Monday after just 27 days in the role and less than 24 hours after announcing his cabinet line-up.
He served as France's fifth prime minister since Emmanuel Macron’s re-election as president in 2022.
Marine Le Pen of the National Rally urged Macron to call a snap parliamentary election, while France Unbowed said Macron himself must go, according to Reuters.
The political turmoil is unlikely to have a significant impact on the FSRs of French insurers as some rating agencies, such as AM Best, do not impose a cap on FSRs based on sovereign ratings.
AM Best maintained its negative outlook on France's non-life insurance segment in July, in part based on the country remaining "prone to social disruptions and unrest, which could be exacerbated by potential adverse legislative or regulatory changes and political instability".
Scor's ratings were most recently updated on January 23 when AM Best removed the under review with developing implications status and affirmed its FSR of A with a stable outlook.
S&P NEGATIVE ON FRANCE, POSITIVE ON AXA
S&P Global Ratings' general criteria states that an entity can be rated above the sovereign foreign currency rating "if, in our view, there is an appreciable likelihood that it would not default if the sovereign were to default".
"A sovereign rating may be a constraint to an insurer’s FSR if the insurer’s FSR could be potentially above the sovereign rating from the application of our insurance criteria," Taos Fudji, senior insurance analyst at S&P Global Ratings, told The Insurer.
"In such cases, we may assign an FSR higher than the sovereign rating only if the insurer’s exposure to investments in the country is below our materiality threshold of 25% or if we believe the insurer would be resilient to a potential default of the sovereign."
For example, S&P rates Axa Group higher than France because its exposure to French investments is less than 15% of general account investments. On Friday, S&P confirmed an issuer credit rating of A-plus for Axa with a positive outlook.
On February 28, S&P revised its outlook on France to negative from stable. The following week, it took the same action for Covéa Coopérations.
"We put the ratings on Covéa Group and on its reinsurance subsidiary PartnerRe on negative outlook in March 2025 because of Covéa Group’s exposure to French assets," explained Fudji.
"In addition, a lower sovereign rating may result in higher credit risk charges when we apply S&P’s insurance capital model to determine an insurer's financial risk profile and could negatively influence our view of the level of risk for the insurers operating in that country."
Moody's cross-sector methodology document permits an issuer to be rated two notches above the sovereign, on the condition that, among others, Moody's considers that the issuer is highly unlikely to default as a consequence of sovereign credit stress or default, and that the issuer generates at least a majority of revenues and cash flow outside of the country and has a similar portion of its assets located outside of the country.
"For insurers, we typically compare the sovereign bond rating to the standalone credit profile, which is an opinion of an insurer’s standalone intrinsic strength, absent any extraordinary support from an affiliate or government," said the Moody's document.
"In addition, if the IFSR incorporates support, we may also consider constraints that the sovereign rating places on the ability and willingness of the supporter."
On September 16, Moody's updated Axa's FSR to Aa2, with the outlook changed to stable from positive on the basis that Axa’s credit profile is "only moderately exposed" to French sovereign risk, with French operations contributing 24% of group underlying earnings.
"Given Axa’s very high rating of Aa2 for IFSR, an upgrade of the ratings is unlikely over the next 12-18 months," said Moody's.
It added that downward pressure on ratings could be driven by weakening of franchise strength or significant changes in the structure of the group, or a "material weakening" in the credit profile of the French sovereign.
Moody's has not taken a rating action on Scor since it affirmed an A1 FSR with a stable outlook on September 6, 2024.
FITCH: FRENCH CARRIERS 'UNAFFECTED'
Fitch previously said that French insurers' ratings are unaffected by its September 12 downgrade of France's long-term foreign currency issuer default rating to A-plus from AA-minus.
The exception among French insurers is CNP Assurances, which Fitch said it had downgraded to A to align with the issuer default rating of its parent La Banque Postale. CNP's standalone credit quality remains unchanged at AA-minus.
The industry profile and operating environment (IPOE) range of French carriers remains at AA-plus to A-minus, with a stable outlook, Fitch said last month, as the sovereign rating downgrade drivers do not immediately weaken the carriers' operating conditions.
According to Fitch's master criteria for insurance rating criteria, the midpoint of the six-notch score for country risk is typically capped at the local currency sovereign rating. As a result, the upper end of the score is no higher than two or three notches above the sovereign.
"In some cases the sovereign rating will cause the IPOE score to be constrained due to a sovereign cap applied to the midpoint of the IPOE score range," said the Fitch document.
"The committees will consider if there are mitigants that materially reduce the exposure of the business to local country risks, such as material diversification outside of the primary country."
Comments