The credit default swaps market has been more bearish about life insurers than Moody’s Investors Service has been, but Moody’s says it believes its credit ratings reflect life insurers’ true level of resilience.
The CDS market gives participants a vehicle for profiting from speculation about how likely companies and government agencies are to pay their debts.
The credit ratings that Moody’s, New York, assigned to life insurers and the ratings implied by CDS market performance were roughly comparable up until September 2006, according to Moody’s data.
The CDS market was a little more bullish on insurers from September 2006 through June 2007, and a little more bearish from June 2007 until December 2007.
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Starting in December 2007, the CDS market opinion of life insurers deteriorated sharply. Earlier this year, the CDS market was implying that the typical Moody’s-rated life insurer was about 3 rating notches riskier than Moody’s said it was. Now, the gap has narrowed to about 2 notches.
The CDS market is also somewhat more bearish than Moody’s about the property-casualty market, but there the gap is only about 1-notch wide.