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How well-diversified are your big-ticket clients’ life insurance issuers?
Standard & Poor’s threw Uncle Sam, the insurance industry and financial advisors for a real loop in April when it downgraded long-term U.S. government debt to AAA negative from AAA stable and revised its outlooks for five U.S. insurance groups to negative from stable.
Those insurers, based on published reports, are Knights of Columbus, New York Life Insurance Co., Northwestern Mutual Life Insurance Co., Teachers Insurance & Annuity Assoc. of America (TIAA), and United Services Automobile Association (USAA).
At the same time, S&P affirmed its 'AAA' counterparty credit and financial strength ratings on these companies as well as all related issuer ratings. Per S&P's criteria, the ratings on these five U.S. insurance groups are constrained by the U.S. sovereign rating because the insurers' businesses are concentrated in the United States. Domestic assets account for a large proportion of their portfolios.
S&P factored direct and indirect sovereign risks into its financial strength ratings. Those included such factors as the impact of macroeconomic volatility, currency devaluation, asset impairment, and investment portfolio deterioration. If S&P were to lower its rating on the United States, the insurance ratings of those insurers also would likely be lowered.
Should you be concerned? Yes—if Uncle Sam can’t resolve the country’s budget problems. Standard & Poor’s action is a clear warning, says Bill Gross, manager with Pacific Investment Management Co. (PIMCO), Newport Beach, Calif.
Nevertheless, assuming Congress gets its federal budget act together, the insurance industry is a lot stronger than it was two years ago.
“After an alarming two-year period ended in 2009—where the life/health industry experienced almost five times as many downgrades as upgrades—2010 saw more balance in overall rating changes with 28 upgrades and 28 downgrades,” says Joseph Zazzera, managing senior financial analyst with A.M. Best, Oldwick, N.J. “This reflects A.M. Best Co.’s view that life/health companies—coming off the lows seen during the financial crisis—are continuing to strengthen their balance sheets and liquidity profiles.”
A.M. Best revised its outlook on the life/annuity segment’s rating outlook to stable in July 2010 from negative.
Zazzera says A.M. Best observed in 2010 several significant trends including: A slow but steady improvement in overall economic conditions, enhanced capital positions at life/health operating and holding companies, lower unrealized and realized investment losses, and refined risk management practices.
Although the underlying trend indicates a stable life insurance industry, a report by Zacks Equity Research, Chicago, suggests advisors should monitor the financial strength of client insurance companies.
“Higher than average asset losses for life insurers, primarily as a result of their real estate exposure, will remain a major concern in 2011,” it reports.
The near collapse of the financial system in 2008 and 2009 makes it prudent to recommend the financially soundest insurance companies—even though their premiums may be higher than those of lower-rated competitors. Financially weaker companies may carry A.M. Best ratings below B+, Fitch ratings below BBB-, Moody’s ratings below Baa3 and S&P ratings below BBB-.
If a company goes belly-up, policy owners get limited protection from state guaranty associations, which are funded by insurance companies. State laws vary, but at a minimum, they’ll typically cover $300,000 in life insurance death benefits; $100,000 in cash surrender or withdrawal value for life insurance and annuities; and $100,000 in health insurance policy benefits, according to the National Organization of Live & Health Insurance Guaranty Associations, Herndon, Va.
According to the most recent tally by Insurance Forum, Ellettsville, Ill., on Aug. 2, 2010, A.M. Best had 23 insurance companies with its top A++ rating; nine had Standard & Poor’s top rating of AAA; six had Moody’s Investors Service top rating of Aaa; and seven had Fitch Ratings top AAA rating.
The following insurance companies maintained their high financial strength ratings of A (Excellent) to A++ (Superior) for 75 years, according to the most recent analysis by Best’s Review in 2010:
· Aviva Life and Annuity Company, rated A.
· Country Life Insurance Company, rated A+.
· Genworth Life and Annuity Insurance Company, rated A.
· Metropolitan Life Insurance Company, rated A+.
· Nationwide Life Insurance Company of America, rated A.
· New York Life Insurance Company, rated A++.
· Northwestern Mutual Life Insurance Company, rated, A++.
· Penn Mutual Life Insurance Company, rated A+.
· Principal Life Insurance Company, rated A+.
· Prudential Insurance Company of America, rated A+.
· Standard Insurance Company, rated A.
· Western Southern Life Insurance Company, rated A+