Life insurers with triple-A credit ratings may be downgraded by Standard & Poor's, the rating agency which also cut the credit rating of the U.S. government, The Wall Street Journal reports.
The S&P downgrade of the U.S. will likely affect almost every insurer because Treasurys and debt from government entities such as Fannie Mae typically make up at least 10 percent of life insurance companies’ portfolios.
A big plus for insurers has been that they haven’t been required to hold capital to back Treasurys up, as they are required to do with almost all other investments.
The rating firm's move could change that, forcing insurers to set aside capital to back up their Treasury holdings—and if Treasurys fall in value, insurers' investment income would become sluggish.
The National Association of Insurance Commissioners (NAIC), the state regulators that set investment guidelines that most states adopt, will need to decide if it wants to apply a capital charge to Treasurys.
Current NAIC guidelines require insurers to set aside 0.4 percentage point of the amount invested in bonds rated from A-minus to triple-A if they aren't backed by the full faith and credit of the U.S. government.
Should that same charge apply to the roughly $244 billion in Treasurys held last year by life and property-casualty insurers, the industry would need to set aside about $1 billion for those securities.
The insurers currently rated triple-A by S&P are Knights of Columbus, New York Life Insurance Co., Northwestern Mutual Life Insurance Co., Teachers Insurance and Annuity Association of America, and United Services Automobile Association.
All these companies have said their financial strengths justify continued triple-A ratings, and that they remain confident in the strength of their business models.
Reuters reports that Moody’s Investors Service said insurers with the highest credit rating could probably withstand a one-notch cut in the United States' sovereign credit rating without having their own rating lowered.
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