Continuing economic weakness in certain European countries and the debt crisis in the United States have elevated the risk profile of U.S. insurers. The hard-won agreement between Congress and the Obama administration to increase the U.S. debt ceiling averted a default by the U.S. government, but the deal falls short of erasing all uncertainty as to the credit quality of U.S. sovereign debt. Though A.M. Best does not employ a sovereign ceiling, sovereign debt downgrades are a factor taken into consideration when assessing the financial strength of an insurer.
Recent stress testing undertaken by A.M. Best Co., as detailed in the Best’s Briefing Sovereign Debt Pressure Spreads to Insurers’ Balance Sheets, considered the possibility of a sovereign rating downgrade, albeit more severe than what has occurred to date. But regardless of the severity, the luster of U.S. Treasury securities as a virtually risk-free investment has been tarnished. Nevertheless, they remain a necessary mainstay of insurers’ portfolios, especially for life companies. Meanwhile, broader macroeconomic concerns that were part of A.M. Best’s stress scenario loom as large as ever.
For property/casualty (P/C) rating units, the estimated impact of the economic stress scenario on balance sheet strength as measured by Best’s Capital Adequacy Ratio (BCAR) was an average decline of approximately 47 points. A.M. Best estimates that less than 2% of all P/C rating units potentially could have seen their ratings impacted by the stress scenario.
Stress testing had a more significant impact on life/annuity (life) BCAR ratios. On July 19, 2011, A.M. Best indicated that it was considering a revision in the rating outlook for the U.S. life/annuity sector to negative from stable. Given reports of continuing economic weakness, the likelihood of such a change in outlook in the near term remains elevated. A.M. Best will continue to review each company on a case-by-case basis and take rating actions accordingly.