Industry Effects of U.S. Ratings Revision, Potential Downgrade

Yesterday afternoon, Fitch Ratings affirmed the United States’ ‘AAA’ rating, but revised its outlook to ‘negative,’ stating in a release that “the negative outlook indicates a slightly greater than 50 percent chance of a downgrade over a two-year horizon.” Today, insurers—especially those with heavier investments in government bonds—are getting an answer to the question of whether another downgrade would greatly impact their financial situations.

Fitch has confirmed today that the ratings and outlooks of four U.S. insurance companies will not be affected by the revised outlook of the United States: “New York Life Insurance Company,Northwestern Mutual Life Insurance Co., Teachers Insurance and Annuity Association of America, and United Services Automobile Association top-notch 'AAA' insurer financial strength ratings are neither directly nor indirectly linked to government support and therefore are not capped at the rating of the U.S. government. Accordingly, the rating outlooks for all four groups of companies remain stable. “

Going one step further, the Insurance Information Institute (I.I.I.) released a statement this morning similarly calming insurers. Speaking to the possibility of another ratings agency downgrading the United States, I.I.I. stated “it will not adversely affect the operations of U.S. property/casualty insurers in any significant way, nor will it impact insurer solvency or liquidity.”

Despite the fact that the S&P downgrade from August directly affected the ratings of five insurance companies, four of which were named by Fitch above, the III asserts the fact that the property/casualty industry’s investment in U.S. Treasury bonds accounts for roughly six percent of the industry’s total invested assets.

“The nation’s property/casualty insurers have very limited direct exposure to the U.S. government bond market and have collectively set aside hundreds of billions of dollars to pay unanticipated claims,” said Dr. Robert Hartwig, president of the I.I.I. and an economist. “Both of these factors will enable the industry to operate effectively despite any further downgrade of long-term U.S. bonds.”