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USA : ratings drop should not hurt insurers

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Four AAA rated life insurers may hold on to their status, provided that the US Government bond rating does not fall by more than one unit.

Strong balance sheets and underwriting skills have been a leg up for top-rated insurers New York Life Insurance Co., Northwestern Mutual Life Insurance Co., Teachers Insurance & Annuity Association of America and United Services Automobile Association, Moody’s Investors Service wrote in a report last week.

The four insurers’ ratings are tied to those of the United States because most of their business is based in this country, and the majority of their investments are tied to domestic issuers.

If the United States’ sovereign-debt rating is confirmed at Aaa or cut by just one notch to Aa1, the insurers are likely to hold on to their ratings. But if the government bond rating falls to Aa2 or further, the life insurers’ ratings could fall accordingly, Moody’s wrote.

Although life insurers are investors in government bonds, this will be only one consideration behind cutting ratings for carriers if the United States is downgraded, said Joel Levine, senior vice president at Moody’s. “The impact isn’t so much that the insurers are holding government bonds; it’s more the macro environmental factors that lead to a multinotch downgrade,” he said.

High unemployment and large deficits are generally bad news for life insurers.

Rising taxes for individuals would cut disposable income and make customers less willing to buy life insurance, while rising unemployment doesn’t augur well for sales of group insurance coverage, Mr. Levine said.

Source : Investment News