When Fitch Ratings downgraded 35 insurance companies, or 42% of its 83 life company universe, earlier this month, it said the moves largely reflected changes in the industry.
There is not any significant deterioration of company ratings, but rather a change in the outlook for the industry and a change in the long-term way of looking at ratings, Julie Burke, managing director of Fitch, Chicago, explained during a conference call.
She said no company had been downgraded by more than two notches.
However, a representative of one insurer posed the question during the conference call of whether competing financial services industries, such as banks, are receiving the same kind of review from Fitch. Burke said that may be the case but she could not say definitively whether other reviews were being conducted.
The insurers representative feared that the slew of downgrades might push policyholders to other financial services sectors and become a “self-fulfilling prophecy” given the “intense competition.”
But, throughout the conference call, Burke emphasized that the downgrades were “not deep shifts,” but rather “modest adjustments” to life insurer ratings.
Mutual insurers and companies selling traditional whole life products fared the best, according to Burke.
Of six “AAA”-rated insurers, two were predominately property-casualty groups and four were life insurance groups. Of the latter four, all were mutual companies that could be “managed conservatively,” free of shareholder interests, she added.
The breakout of the Fitch universe of rated life insurance companies is as follows: “AAA,” 8%; “AA+,” 10%; “AA,” 21%; “AA-,” 25%; “A+,” 13%; “A,” 14%; “A-,” 4%; “BBB+,” 1%; “BBB,” 1%; “BBB-” or lower, 3%.
In addition to the 35 downgrades, 36 companies or 43% were affirmed at their current rating. The remaining insurers were given outlooks that ranged from rating watch negative to affirmed but with a negative outlook.
Even with the ratings changes, Fitchs average adjusted estimate of risk-based capital for these life insurers was 300%-325% at year-end 2001.
Fitch adjusted RBC criteria established by the National Association of Insurance Commissioners, Kansas City, Mo., by 25 basis points or a quarter of a percent, to reflect holdings of nonguaranteed separate account assets.
The rating downgrades also reflect “troubled capital markets,” Burke said. She added that product business risk was also considered by Fitch. From the least to most risky, Burke said products were ranked as follows: traditional whole life; universal life, term life and variable universal life; group life; group pension products; individual fixed; individual variable products; institutional products such as guaranteed investment contracts; and health products such as disability and long-term care insurance.
The ratings changes reflected the deterioration of capital markets and the fact that equity markets would probably not experience a quick turnaround, Burke said. However, in the case of another significant deterioration, those ratings could be looked at again, Burke said.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 30, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.