Marketwatch has the story:
S&P said it lowered its counterparty credit and financial strength ratings on 10 groups of U.S. life insurers, and its counterparty credit ratings on seven U.S. life insurance holding companies.
“In response to the extreme pressures in the global economy, we recently published criteria that outlined the incremental stress analysis we are now applying to U.S. insurers’ bond holdings, commercial mortgages, and commercial mortgage-backed securities when we assess these companies’ capital adequacy,” S&P said.
The ratings firm added that, “Although today’s rating actions reflect our opinion of a general decline in the overall creditworthiness of the U.S. life insurance sector, we continue to believe the credit fundamentals of the life insurance industry are strong.”
Insurers affected by the ratings changes include Conseco Inc., which saw its counterparty credit rating cut to CCC, denoting very weak security characteristics. Genworth Financial Inc. saw its rating cut to BBB, denoting good but more likely to be affected by adverse business conditions than higher-rated insurers, while Hartford Financial Services Group Inc.’s rating was cut to BBB+
The S&P report, which can be found here if you sign up for a free account has many salacious tidbits backing what I’ve been saying for several weeks now on a topic we’ve blogged about for months beginning with Senate Majority Leader Harry Reid’s welcome here last fall. Here are some excerpts:
Standard & Poor’s also said that it placed its ratings on two groups of U.S. life insurers, one of which was also downgraded, on CreditWatch with negative implications. At the same time, Standard & Poor’s revised its outlook on an additional U.S. life insurer to negative from stable…………….
In response to the extreme pressures in the global economy, we recently published criteria that outlined the incremental stress analysis we are now applying to U.S. insurers’ bond holdings, commercial mortgages, and commercial mortgage-backed securities when we assess these companies’ capital adequacy (see “Methodology For Incorporating Incremental Stress Factors Into The Capital Adequacy Analysis Of North American Life And Health Insurers,” Feb. 18, 2009, RatingsDirect). Today’s rating actions primarily reflect the incorporation of these incremental asset stress factors into our capital adequacy analysis 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………………………
The depressed equity markets have driven the lower level of operating earnings, resulting in lower asset-based fees, higher costs associated with guaranteed benefits, increased write-offs of deferred acquisition costs (GAAP only), and reduced net investment income. In addition, today’s rating actions took into account the specific financial flexibility characteristics of each firm and their respective costs of capital given today’s financial markets.
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. The market dislocations are hampering two areas that we view as particularly important to financial flexibility: liquidity and access to the capital markets. 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. The rating actions we took today have incorporated these concerns………….
The pressures within the life sector have been building. In October 2008, we revised our outlook on the U.S. life insurance industry to negative from stable based on poor financial market conditions and the likelihood of a prolonged period of weaker-than-expected economic conditions. The outlook remains negative. Since October 2008, macroeconomic factors have continued to weaken, as the U.S. is in the midst of perhaps its longest recession in a generation, and our economists believe it is just entering its most difficult phase. Our baseline economic forecast is for a deep and long recession, with a sluggish recovery beginning in mid-2009. Standard & Poor’s economists are also forecasting negative GDP growth in the first half of 2009 after declines in the second half of 2008, for a total peak-to-trough decline of 3%. The dramatic rise in the expected level of corporate defaults reflects our opinion of the weak credit profiles of many corporations going into this period of economic contraction. Given these difficult economic conditions, we believe that life insurers’ bond holdings, commercial mortgages, and commercial mortgage-backed securities (CMBS) could experience unprecedented stress in the next 12-18 months.
The S&P was way behind the curve when they went negative after issues like the Hartford (HIG) imploded but the in the know money was already well positioned then. the problems with subprime had been an open secret since Bear Sterns imploded earlier that Summer. S&P had their heads firmly inserted up their posteriors until the bitter end. I say that because the S&P then spends the balance of the report telling us what great investments these dog$hit life insurance stocks still remain over the longer term. The real question is which ones of this life insurance 10-pack will survive. As I’ve previously stated, IMHO the Hartford is toast. Other life insurers that failed to make the grade at S&P include Met Life, Pacific Life and Prudential.