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Rating Agency Moves Reflect Tough Times

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Ratings downgrades and negative ratings agency reports are piling up.

During the first half of February, ratings agencies announced reviews and actions concerning many major insurers.

Here is a sampling of some of them:

- Aegon N.V., The Hague, Netherlands: Aegon’s U.S. life insurance operating companies had their insurance financial strength ratings downgraded to A1, from Aa3 by Moody’s Investors Service, New York, and the outlook on all Aegon companies termed negative.

The downgrade reflects deterioration in profitability and financial flexibility as well as tighter liquidity, according to Moody’s.

- Ameriprise Financial Inc., Minneapolis: Ameriprise and its life units were assigned a negative outlook by both Moody’s and Standard & Poor’s Corp, New York.

- Genworth Financial Inc., Richmond, Va.: Genworth’s primary life insurance subsidiaries have had their insurance financial strength rating downgraded to A minus, from A plus, by Fitch, and Fitch has assigned the company a negative outlook. The change reflects factors including the company’s statutory capitalization, liquidity and financial flexibility.

- Lincoln National Corp., Radnor, Pa.: The Aa3 insurance financial strength rating of Lincoln’s subsidiaries is under review for a possible downgrade by Moody’s.

- Manulife Financial Corp., Toronto: Manulife subsidiaries Manufacturers Life Insurance Company, John Hancock Life Insurance Company, and John Hancock Life Insurance Company (USA) have had their Aa1 insurance financial strength rating placed under review by Moody’s for a possible downgrade. Moody’s said any downgrade likely would be limited to one notch.

- MetLife Inc., New York: MetLife’s Aa2 insurance financial strength ratings were affirmed by Moody’s but the outlook on the company was changed to negative.

- Pacific LifeCorp., Newport Beach, Calif.: The insurance financial strength ratings of Pacific LifeCorp and its life insurance subsidiaries have been affirmed but the outlook changed to negative, from stable, by Moody’s.

- Principal Financial Group Inc., Des Moines, Iowa: Principal is now on S&P’s CreditWatch with negative implications.

- Prudential Financial Inc., Newark, N.J.: The Aa3 insurance financial strength rating of Prudential’s subsidiaries is on review by Moody’s for a potential downgrade.

And S&P revised the outlook on Pru’s insurance subsidiaries to negative, from stable, and affirmed the AA financial strength ratings of these companies.

- Sun Life Financial Corp., Toronto: The ratings of Sun Life and the ratings of its insurance units, Sun Life Assurance Company of Canada and Sun Life Assurance Company of Canada U.S., have been downgraded by Moody’s to Aa3, from Aa2. Moody’s has returned the ratings outlook for the parent to stable, but the outlook remains negative for the insurance units.

S&P has placed the AA minus ratings of Sun Life and Sun Life’s life subsidiaries on CreditWatch with negative implications, citing deteriorating macroeconomic conditions.

The ratings agencies also have issued special reports that indicate that insurers still need to clear major hurdles.

Fitch Ratings, New York, has predicted that broad, shallow downward activity will continue throughout the year, with many ratings falling 1 or 2 notches.

The rating agency says the life industry has fared better than other financial institutions due mainly to lower liquidity exposures and sub-prime assets as well as stronger balance sheets at the start of the crisis.

But insurers are facing drops in the market value of investments along with a lack of flexibility caused by tight capital markets, Fitch says.

Meanwhile, variable annuity capital markets exposure could force VA issuers to increase reserves, Fitch says.

Fitch says it expects the extent of downgrades to be greater among life insurers than among non-life companies.

The rating agencies say government aid delivered through program such as the Troubled Assets Relief Program could reduce the need for downgrades.

In a new Moody’s report discussing Moody’s annual ‘trigger’ survey, the rating agency says the use of rating triggers in financial and insurance contracts in the U.S. life insurance and reinsurance industry has increased since 2007.

Rating trigger usage increased in nominal terms by 5%, compared with a 9% decline from 2006 to 2007.

A total of 75% of 76 respondents had exposure to one or more types of rating triggers, while 25% reported no rating triggers, according to Moody’s.

In the past, rating triggers mainly affected deal pricing. Now, a higher percentage of the triggers activate termination clauses, Moody’s says.

The triggers are being tightened in bank loans and in derivative arrangements as credit markets have tightened, Moody’s says.

Insurers are facing increased use of triggers at a time when the insurers are under the most stress, according to Laura Bazer, a senior credit officer at Moody’s.

The increased use of triggers could be especially hard on reinsurers, Bazer says.

If the direct writers have to recapture business from reinsurers, there could be capital and risk implications, Bazer says.

At Fitch, analysts say the rating outlook for most sectors is negative.

The anticipated 1-notch and 2-notch rating cuts may affect “over half of Fitch’s rated universe of insurance ratings,” Fitch says.

Although some insurers are feeling pressure, many have fared better than companies in other financial services sectors, reflecting lower liquidity exposures, lower exposures to sub-prime assets including collateralized debt obligations and credit default swaps, and “generally stronger balance sheets at the onset of the crisis,” Fitch says.

Fitch says it will consider “potential mitigants available to management,” such as hedging, policyholder dividend adjustments, crediting rate adjustments and reinsurance; when assessing insurers.


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