S&P Takes Action on Insurance Groups Following U.S. Sovereign Downgrade

By | August 8, 2011

Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States of America to ‘AA+’ and assigned a negative outlook on Aug. 5, and as a result the rating agency also took action on 10 U.S.-based insurance groups.

The rating agency said today that it lowered to ‘AA+’ from ‘AAA’ its long-term counterparty credit and financial strength ratings on the member companies of five U.S. insurance groups: Knights of Columbus, New York Life, Northwestern Mutual, Teachers Insurance & Annuity Assoc. of America (TIAA), and United Services Automobile Assoc. (USAA). The outlooks on the ratings on all of these companies are negative, the rating agency said.

Standard & Poor’s also said that it lowered the ratings on approximately $17 billion of securities issued by New York Life, Northwestern Mutual, TIAA, USAA, and their affiliates.

At the same time, Standard & Poor’s affirmed the ‘AA+’ ratings on the members of five other insurance groups — Assured Guaranty, Berkshire Hathaway, Guardian, Massachusetts Mutual, and Western & Southern — and revised the outlooks on ratings on these companies to negative from stable.

The rating actions on these 10 insurance groups follow the lowering of the long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ on Aug. 5, 2011.

“We factor direct and indirect sovereign risks — such as the impacts of macroeconomic volatility, currency devaluation, asset impairments, and investment portfolio deterioration — into our financial strength ratings,” S&P said in a statement. “Per our criteria, the sovereign local-currency credit rating constrains our financial strength ratings on insurers.”

The 10 affected insurance groups operate in the U.S. and generally have significant holdings of U.S. Treasury and agency securities. For the insurers with the most exposure, these investments constituted as much as 200% of total adjusted capital at year-end 2010, according to S&P.

“In our opinion, very strong financial profiles and favorable business profiles support the ‘AA+’ ratings on the 10 affected U.S. insurance groups. In our view, these companies maintain very strong capital and liquidity. In addition, we believe that the significant retail insurance liabilities–such as whole life insurance and deferred annuities–that some of these companies have are less prone to withdrawals or surrenders than institutional liabilities.”

Knights of Columbus, TIAA, and USAA also benefit from affinity relationships with their policyholders, which enhance the persistency of liabilities, S&P noted.

S&P said its view of these companies’ fundamental credit characteristics has not changed. “Rather, the rating actions reflect the application of criteria and our view that the link between the ratings on these entities and the sovereign credit ratings on the U.S. could lead to a decline in the insurers’ financial strength. This is because these companies’ businesses and assets are highly concentrated in the U.S.”

Under S&P’s criteria, the local-currency sovereign credit rating on the U.S. constrains the ratings on domestic insurance operating and holding companies. If S&P were to lower its rating on the U.S. again, the rating agency would likely take the same rating action on the affected insurers and their related obligations.

“Alternatively, if we were to revise the rating outlook on the U.S. to stable, we would likely revise the outlook on the affected insurers to stable, assuming there is no deterioration in a particular insurer’s business and financial profiles,” S&P said.

Meanwhile, state regulators moved to assure the public that the S&P downgrade of the U.S. credit rating would not have any effect on insurance companies’ investments.

Susan E. Voss, president of the National Association of Insurance Commissioners and Iowa Insurance Commissioner, issued the following statement:

“There is no impact on insurer investments in U.S. government and government-related securities from the actions recently taken by the rating agencies. 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.”

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