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Insurance Insiders See Downgrades Coming for Life Insurers

Source: Dow Jones Wire

Posted on 13 May 2009

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Even if life insurers do eventually get TARP capital, it may not save some from ratings downgrades amid falling sales, troubled investments and headline-grabbing losses, say industry veterans.

The latest downgrade came Tuesday to Hartford Financial Services Group Inc. (HIG), as Fitch Ratings downgraded the financial-strength and other ratings of Hartford's life-insurance business. Hartford had suspended annuity sales in some international markets and said it would raise prices on its popular lifetime income guarantee on its U.S. annuities to preserve capital after reporting a $1.21 billion first-quarter loss.

Observers say downgrades from the other ratings agencies could soon follow.

"Ratings agencies are under pressure because of how they rated in the past, to pay more attention to what is going on," said Ernie Csiszar, insurance industry director with consulting firm Bridge Strategy Group, former director of the department of insurance of South Carolina and former president of the National Association of Insurance commissioners.

Downgrades for Hartford and possibly other troubled insurers are "inevitable," Csiszar said in a recent interview. A spokeswoman for Hartford did not immediately respond to a call asking for a comment on the downgrade.

Fitch downgraded Hartford's life-insurance businesses one notch to A- Tuesday, citing Hartford's cutback in sales and the negative impact of "currently volatile credit and equity market conditions," which could further weaken the company's capital position and earnings, and potentially lead to more downgrades.

Standard & Poor's, Moody's Investors Service and A.M. Best have not weighed in since their Hartford downgrades earlier this year, but all suggested more cuts could be coming.

Moody's said that material additional investment losses of more than $1.5 billion pretax in coming quarters, or a risk-based capital ratio below 275%, could trigger additional downgrades.

Standard & Poor's said factors that would contribute to a downgrade for Hartford are a weakened competitive position, further equity market declines or other economic pressures that drive Hartford's capitalization lower.

Signs of weakness were evident in Hartford's first-quarter loss, including lower sales almost across the board in its life and retirement businesses, and continued investment losses. Hartford estimated that its risk-based capital ratio was between 420% and 430% at the end of the quarter.

Hartford and other brand-name life insurers use their financial-strength ratings as a marketing tool to give an overall measure of the company's ability to meet its insurance policy and contractual obligations. Retail and institutional customers gravitate to A and higher ratings, which top out at triple-A.

Downgrades at Hartford "will create further challenges for the franchise in 2009 and beyond," Thomas C. Walsh, an analyst with Barclays Capital, wrote in a recent research note. "Should lower ratings further challenge its ability to generate profitable growth and if markets remain depressed, its ability to generate capital and absorb credit losses will weaken." B

ut Andrew Kligerman of UBS believes ratings agencies may hold off for companies that look certain to receive TARP, he said last week. "At the very least, it could temporarily hold them at bay."