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S&P's Downgrade of U.S. Likely to Impact Some Life Insurers

Source: WSJ - Leslie Scism

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Posted on 08 Aug 2011

A handful of top life insurers with triple-A credit ratings are expected to suffer a downgrade from Standard & Poor's in line with the rater's downgrade of the U.S. government Friday.

More broadly, the rating firm's move means insurers that hold Treasurys in their investment portfolios may well end up required to set aside capital to back up those holdings.

In mid-July, when the U.S. government was warned of possible action by S&P, the ratings firm also put the five insurers holding its coveted triple-A rating on CreditWatch negative. S&P said the move was the "downstream effect" of its action on the nation's credit rating; under S&P's criteria, a nation's rating constrains the financial-strength ratings on insurers.

The insurers currently rated triple-A by S&P are Knights of Columbus, New York Life Insurance Co., Northwestern Mutual Life Insurance Co., Teachers Insurance and Annuity Association of America, and United Services Automobile Association.

In recent interviews, the companies said their financial strength justified continued triple-A ratings, and that they remain confident in the strength of their business models.

"The Knights of Columbus has earned a rating of AAA from Standard & Poor's for 19 consecutive years, and we have every confidence in our continued success because we have a fundamentally solid business model which continues to serve us well," a Knights of Columbus spokesman said Saturday.

"Any S&P ratings downgrade tied to the federal government would have little impact for USAA because the action is completely unrelated to our financial strength," said USAA in a statement. The insurer said it "remains exceptionally strong and is fully capable of meeting its commitments to members around the world."

A New York Life spokesman noted earlier this summer that S&P had affirmed New York Life's AAA counterparty-credit and financial-strength ratings in April.

"We disagree with S&P's stated view that the AAA-rated insurers should be downgraded in lockstep with the sovereign. Both Moody's and Fitch are of the opinion that the insurers can have a higher rating than the sovereign. We agree with their assessment. In fact, last month Moody's confirmed New York Life's rating of Aaa with a stable outlook, while they placed the United States on a negative outlook," said a New York Life spokesman Saturday.

The other companies couldn't be reached immediately Saturday for comment.

These insurers are expected to maintain their top ratings from other ratings firms that haven't downgraded the U.S.

Almost every insurer in the U.S. would likely be touched by the downgrade of the U.S. government, because Treasurys and debt from government entities such as Fannie Mae are popular holdings in the big investment portfolios that back up customers' policies. In the life-insurance industry, such investments typically range from 10% to 15% of total holdings.

If Treasurys fall in value, that would add to woes created by low interest rates, namely that insurers' investment income is sluggish.

A big plus of Treasury holdings has been that insurers aren't required to hold capital to back them up, as they are with almost all other investments to protect policyholders in case the investments sour, regulators said.

With the U.S. government now downgraded by S&P, the National Association of Insurance Commissioners—state regulators that set investment guidelines that most states adopt—would need to decide if it wants to apply a capital charge to Treasurys, and, if so, how much.

Under current NAIC guidelines, insurers must set aside 0.4 percentage point of the amount invested in bonds rated from A-minus to triple-A if they aren't backed by the full faith and credit of the U.S. government, a representative of the organization of state officials said in a recent interview.

Should that same charge apply to the roughly $244 billion in Treasurys held last year by life and property-casualty insurers, the industry would need to set aside about $1 billion for those securities.


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