S&P Global Ratings analysts kept assuring attendees at the firm’s latest insurance conference Wednesday that life insurer capital levels, investment portfolios and ratings look fine.
S&P analysts have concluded that, even though the average rating of the life insurers it rates is an A+, those insurers have 10% more total capital than they would need to qualify for an AA rating.
But guest speakers at the conference, in New York, talked often about the problems that might come along and wreck everything.
Worries about those problems might eventually blow away. But, if some of the problems show up, they could cause big changes in which companies are in what markets, and what those companies’ insurance products cost.
Here’s a look at three risks that came up often as powerful causes of nightmares.
1. Structured Finance Arrangements
Creators of collateralized loan obligations and other structured finance arrangements create pools of assets. The creator tries to cut the structured finance arrangement pie into several “tranches,” or slices. Each tranche is supposed to have a different level of risk.
John Nadel, a managing director at UBS Group AG, said the problem is that it’s hard for securities analysts like him to know what’s really in a structured financial arrangement asset pool.
The arrangements “are by their very nature opaque,” Nadel said.
Buyers have to hope the originator did a good job of verifying that the assets in a pool were good assets, and that the rating agencies that rated the different slices of the pie did a good job of rating the slices, Nadel said.
2. BBB Bonds
Under the National Association of Insurance Commissioners’ risk-based capital (RBC) ratio calculation rules, bonds or other instruments with ratings of BBB- or above, or investment-grade instruments, are much more powerful at contributing to a life insurer’s capital total than an instrument related BB+ or lower is.
Investors and others often call instruments that fall to the BB+ rating level or below, from an investment-grade rating level, “fallen angels.”
Several analysts said that life insurers have taken a relatively restrained approach to investing in bonds and other debt securities with ratings of BBB, BBB+ or BBB-, given what a large percentage of the debt securities now available have ratings of BBB- to BBB+,. But the analysts said that life insurers’ BBB-level asset total now makes up a large share of total assets simply because companies are issuing so many more BBB-rated notes and bonds than they issued in the past.
BBB-level bonds now make up about 34% of life insurers’ corporate bond holdings, and about 52% of the Bloomberg Barclays U.S. Corporate Bond Index, according to Guggenheim Investments.