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; Northwestern 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.