NU Online News Service, Dec. 18, 5:09 p.m. – Poor investment returns and low interest rates will continue to hurt life insurer ratings, Standard & Poor’s, New York, predicts in its 2003 industry outlook.
U.S. life insurers were bruised by corporate credit defaults in 2002, and investment-grade bonds, which make up about two-thirds of the industry’s total investment portfolio, declined even more than in 2001, when the Enron scandal broke, S&P analysts observe.
The steep decline in interest rates since the end of 2000 is also taking its toll, squeezing the spread between what life insurers earn on their investments and the returns they have promised policyholders, the analysts add.
S&P says it expects these trends will continue to weigh down ratings, regardless of how well the equity markets do–although the markets were the strongest influence on the rating service’s downgrades of life insurers in 2002.
The report adds that a two-year stock slump turned guaranteed minimum death benefits into a “grim reaper” for insurers heavily involved in the variable annuity business and, at the same time, ate up the “phantom asset” known as deferred acquisition costs.
Still, the report points out, the life industry is among the highest-rated covered by S&P analysts, and the agency predicts life insurers will fare better than property-casualty insurers.