Risk Management

S&P Less Sure of Life Insurance Industry

The credit rater lowers its grades for many U.S. insurers, citing their vulnerability to the sludge-like credit and capital markets.
Stephen TaubFebruary 27, 2009

Standard & Poor’s cut its counterparty credit and financial strength ratings for 10 groups of U.S. life insurers and counterparty credit ratings on seven life insurance holding companies.

The agency also placed two groups of U.S. life insurers, one of which was downgraded, on CreditWatch with negative implications. And S&P revised its outlook on an additional U.S. life insurer to negative from stable. It affirmed its prior ratings on two U.S. life insurers.

S&P explained that the actions reflect its recently published criteria outlining the incremental stress analysis it is now applying to U.S. insurers’ bond holdings, commercial mortgages, and commercial mortgage-backed securities when it assesses their capital adequacy, as well as the effects of severe equity market declines and volatility on earnings and capital adequacy. “We expect that the effect of these factors will challenge life companies’ competitive strengths and ability to generate profitable business,” it added.

S&P explained that given the disarray in the credit and capital markets, most insurers’ financial flexibility has decreased in the past six months. “The ability to access the markets varies by company and from day to day,” it added.

It elaborated that the systemic concern regarding counterparty risk is generally heightened for financial firms. In addition, a lack of liquid markets for many securities has depressed overall access to liquidity for many corporations and financial institutions.

Friday’s report that GDP fell by 6.2 percent on an annualized basis in the final three months of 2008 further underlines S&P’s concerns. “We believe that life insurers’ bond holdings, commercial mortgages, and commercial mortgage-backed securities could experience unprecedented stress in the next 12-18 months,” S&P wrote before the latest economic figures were published.

The rating cuts affected some of the largest insurers, including Metlife, Hartford Financial Group, Genworth Financial, Prudential, Conseco, Lincoln National, Midland National Life Insurance, Pacific LifeCorp, Protective Life Corp, and Security Mutual Life Insurance Co. of NY.

However, Prudential, Lincoln, and Protective Life had their ratings placed on stable outlook, a net positive, according to Credit Suisse Securities in a note to clients Friday morning.

“The sector downgrade didn’t come as a surprise, since Moody’s and Fitch had already taken similar actions, thus we view this as a ‘catch up’ by S&P,” said Credit Suisse. “Therefore, we view the sector downgrade, in and of itself, as a modest negative for the group, but not a surprise.”

However, the investment bank said the bigger surprises in the announcement came from some of the individual ratings actions, the most significant of which is the fact that S&P now has MetLife rated in line with, to slightly worse than, some of its main competitors such as Prudential and Lincoln.

“S&P actions may reduce the perception that MET is the ‘safe haven’ company within the life insurance space,” the bank said.