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.”