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U.S. debt downgrade will not affect insurer investment: Experts

U.S. debt downgrade will not affect insurer investment: Experts

KANSAS CITY, Mo.—Standard & Poor's Corp.'s recent downgrade of U.S. sovereign debt will have no impact on insurer investment, National Assn. of Insurance Commissioners President Susan E. Voss said Sunday.

“There is no impact on insurer investments in U.S. government and government-related securities from the actions recently taken by the rating agencies,” said Ms. Voss, who is Iowa's insurance commissioner, in a statement. “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.”

On Friday, S&P lowered its long-term sovereign credit rating on the United States to AA+ from AAA. The move came after Congress and the White House reached a last-minute agreement to raise the federal debt ceiling, thus eliminating the possibility that the federal government would not be able to honor all of its financial obligations.

S&P statement

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics,” said S&P in a statement. “More broadly, the downgrade reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”

The two other major rating agencies—Moody's Investors Service Inc. and Fitch Inc.—did not downgrade the U.S. debt.

“There will be zero practical impact on the property/casualty insurance industry,” said Robert Hartwig, president and economist at the insurance industry-supported Insurance Information Institute in New York, in an interview. He noted the NAIC statement and added that, “from the perspective of policyholders and claimants, there is no impact on the solvency, liquidity or operations of insurers. In other words, it's business as usual.”

Insurance Information Institute analysis

One theoretical effect of a downgrade is that interest rates on newly issued U.S. government bonds and most other forms of fixed income securities would rise,” said the III in an analysis issued Monday. “This would mean that the market value of existing U.S. government bonds and other fixed income assets would fall. The extent of the drop in value would depend on many things, but the net impact on the value of assets held by P/C insurers should be modest and manageable.”

“I would not expect holdings—i.e., portfolio allocation—to change much,” said Mr. Hartwig. “U.S. debt still remains the gold standard in terms of minimizing risk and maximizing liquidity. Some insurers could decide to increase cash holdings, like businesses in many other industries, until the financial market uncertainty and volatility dissipate.”

In the long term, there should be no real regulatory impact in terms of capital, said J. Paul Newsome, managing partner at Sandler O'Neill Partners L.P. in Chicago. “To the extent that we get higher interest rates out of this,” the change could be positive for insurers, he said.

Insurance units' ratings downgraded

In a report issued shortly before the downgrade, Marsh & McLennan Cos. Inc.'s Guy Carpenter & Co. L.L.C. unit said that “in the event of a downgrade to AA+, most (re)insurers' risk-adjusted capital would not be impacted significantly.”

Even if Congress and the administration had failed to reach the debt ceiling agreement, many industry observers said property/casualty insurers would have been able to avoid serious financial fallout.

Meanwhile, as a result of its downgrade of U.S. sovereign debt, S&P announced Monday that it had 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 Insurance Co., Northwestern Mutual Life Insurance Co., Teachers Insurance & Annuity Assn. of America, and United Services Automobile Assn.

Other groups' outlooks revised

In July, S&P had placed its long-term counterparty-credit and financial strength ratings and related issue ratings on those five insurance groups on review with negative implications because of their significant holdings of U.S. Treasury and agency securities.

Also on Monday, S&P affirmed the AA+ ratings on the members of five other insurance groups—Assured Guaranty Ltd., Berkshire Hathaway Inc., Guardian Life Insurance Co. of America, Massachusetts Mutual Life Insurance Co., and Western & Southern Financial Group—and revised the outlooks on ratings on these companies to negative from stable.

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