NU Online News Service, July 30, 5:50 p.m. – Standard & Poor’s, New York, today changed its outlook for the U.S. life insurance industry to negative from stable and put four groups of life insurers on CreditWatch with negative implications.
S&P also downgraded its outlook for six more insurers.
S&P now has announced either a negative CreditWatch or outlook for about one-third of the U.S. life insurers that it rates.
An S&P outlook indicates S&P’s assessment of the direction a company or industry will probably take over the next one to three years.
A CreditWatch action with negative implications means S&P has stepped up its surveillance of the company with an eye to a possible downgrade in the short term.
The rating service says its newest downgrades stem from questions about the adequacy of capital reserves at some companies because of increased losses on credit instruments, lower values of stock holdings, increased reserving requirements for life-insurance minimum-death-benefit guarantees, and the recent growth in fixed-annuity products.
When life insurers guarantee minimum death benefits or minimum investment returns at a time when their own investment returns are erratic, they have to struggle to maintain earnings while meeting obligations for products with fixed payouts, S&P notes.
By world standards, U.S. life insurers tend to keep a relatively small portion of their own investment portfolios in stocks.
But “falling stock values affect life insurers both directly and indirectly,” S&P says in a statement announcing its new, gloomier perspective on the U.S. life industry. “There is direct exposure through investment portfolios while, for writers of variable annuity products, there is a decline in fee income.”
S&P warned in its mid-year 2002 outlook that stock-market problems could hurt ratings of companies that depend heavily on equity market appreciation. Since then, stock prices have fallen sharply, S&P says.