A.M. Best Reviews Rating Outlook for U.S. Life/Annuity Sector

OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. over the past few months has grown increasingly concerned with the heightened level of global economic uncertainty. Continuing economic weakness in certain European countries and the debt crisis in the United States, which remains unresolved, have elevated the risk profile of life insurers. As a result, A.M. Best is considering a revision in the rating outlook for the U.S. Life/Annuity sector to negative from stable.

“Sovereign Debt Pressure Spreads to Insurers’ Balance Sheets”

Supplementing the standard review of capital adequacy, A.M. Best is reviewing the sensitivity of life insurance companies’ risk-adjusted capitalization under stressed scenarios, as detailed in the Best’s Briefing, “Sovereign Debt Pressure Spreads to Insurers’ Balance Sheets” (July 19, 2011). Initial data indicate that some life companies’ risk-adjusted capital positions are more impacted under these extreme stress scenarios. The results are still under study, and each company will be reviewed on a case-by-case basis.

Of particular interest will be those groups that experienced above-average declines in risk-adjusted capital under the stress scenarios, as well as companies with a high concentration in domestic and foreign sovereign credits. In conjunction with a review of a company’s liability structure and liquidity, A.M. Best may choose to downgrade ratings or revise outlooks to negative as needed.

A.M. Best believes that the current challenges for the life/annuity segment include the following:

• Global sovereign uncertainty;
• Increased equity market volatility;
• Ongoing weakness in the real estate market; and
• Lingering unemployment and weak consumer confidence.

The continued economic fragility will constrain life insurers’ ability to increase revenues and earnings. Clearly, raising the U.S. government debt ceiling would alleviate near-term concerns of default on the highest rated government securities and the potential fallout of such an unprecedented event. However, A.M. Best believes the raising of the debt ceiling on its own will not achieve long-term fiscal stability.

A.M. Best has observed that many insurance companies have taken proactive steps to improve their capital positions, de-risk their product portfolios and position themselves for future growth. Overall capital positions are more robust and earnings trends have been more stable of late. While substantial unrealized loss positions in general account investment portfolios have recovered to a positive gain position, the change in the sovereign credit quality is increasing the industry’s overall investment risk.

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