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Life Health > Life Insurance

U.S. Rating Downgrade: Analysts Shrug

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WASHINGTON BUREAU — A rating agency’s decision to downgrade U.S. government debt could increase life insurers’ investment returns, securities analysts say.

Standard & Poor’s Ratings Services, New York, cut the rating of U.S. debt to AA plus, from AAA, Friday. Investors reacted by shifting money out of stocks and into a safer investment – U.S. government bonds. Ironically, the flight to AA plus safety increased the price of 10-year Treasuries and boosted value of life insurers’ reserves.

S&P analysts today followed up on the U.S. government by lowering the AAA long-term counterparty credit and financial strength ratings of several insurers to AA plus. Those companies include Knights of Columbus, New Haven, Conn.; New York Life Insurance Company, New York; MoneyNorthwestern Mutual Life Insurance Company, Milwaukee; and Teachers Insurance & Annuity Association of America, New York.

The outlooks on the ratings on all of these companies are negative. S&P also has lowered the ratings on about $17 billion of securities issued by New York Life, Northwestern Mutual, TIAA and their affiliates.

S&P affirmed AA plus ratings on the members of several other insurance groups, including Berkshire Hathaway Inc., Omaha, Neb.; Guardian Life Insurance Company of America, New York; Massachusetts Mutual Life Insurance Company, Springfield, Mass., and Western & Southern Financial Group, Cincinnati. S&P revised the outlooks on the ratings on those companies to negative, from stable.

But Susan Voss, president of the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., said Sunday that the downgrade of the U.S. credit rating will have no immediate effect on how regulators’ view insurers’ finances.

“There is no impact on insurer investments in U.S. government and government-related securities from the actions recently taken by the rating agencies,” Voss said in the statement. “Risk-based capital and asset valuation reserves are unaffected. State insurance regulators and the NAIC will consider changes to our regulatory treatment if it becomes necessary in the future.”

Securities analysts say they believe the overall impact of a U.S. ratings downgrade on the life insurers they rate will be modest, and that the effects on life insurers will be smaller than on the other financial services providers they track.

Life insurers with large, “long-tailed” liabilities on their books — such as long-term disability insurance claims and books of fixed annuity business — have been facing painfully low returns on government bond investment holdings for years.

If investors demand higher returns on government bonds, and that increases the interest rates the bonds pay, that could increase life insurers’ investment income, according to Colin Devine of Citi, New York.

“It could also, in isolation, potentially be favorable for life insurer’s share valuations,” Devine says.

“Higher interest rates are not necessarily bad for insurers, as some insurers are facing problems with minimum crediting rates that would be helped by higher rates,” according to analysts in the Chicago

office of Sandler O’Neill & Partners L.P.

Andrew Kligerman of UBS, New York, says a weak economy and a weak stock market would clearly hurt insurers’ sales and variable annuity earnings.

“We are less concerned about liquidity and do not expect material capital implications for our U.S. life insurers because the same risk-based capital charge is applied to AAA, AA, and A rated securities under the present U.S. insurance statutory accounting regime,” Kligerman says.

Devine says that, even if the value of Treasury securities drops, Citi does not expect to see the life insurers it follows forced to sell Treasury or agency investments.

“Japanese life insurers adapted to that country losing its AAA rating and continue to hold large levels of government bonds,” Devine says. “We see no reason why U.S. insurers won’t do so as well.”

If, however, the S&P rating cut hurts the stock market, that could squeeze variable annuities (VAs), lead to higher benefits costs and possibly accelerate deferred acquisition cost (DAC) amortization, Devine says.

Edward Shields, an analyst in the Chicago office of Sandler O’Neill, says one area of potential concern for life insurers is the possibility that offering some products, such as guaranteed investment contracts (GICs), could require use of investments in AAA-rated securities.

“After doing some research and speaking with company representatives, we believe that neither investment-only GICs nor funding agreements (i.e., medium-term notes) typically have AAA investment requirements,” Shields says.

Other federal budget coverage from National Underwriter Life & Health:


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