Run a Google search these days for "insurance company ratings downgrade" and you'll come up with page after page of companies losing ground, from Aegon to ING to Principal Financial to Sun Life. Losing access to various forms of borrowing and finding themselves suddenly in worse shape than they were, numerous companies are seeing their ratings fall at the hands of Fitch, A.M. Best, Moody's, and S&P.
The big headline-grabbers at the moment, of course, are Genworth (see last month's column), Prudential, and AIG. That last may face bankruptcy or breakup before all is said and done, although so far there appears to be little interest in deals for many of the company's business units such as its American Life Insurance unit and AIG Advisor Group, its broker/dealer operation. Would-be buyers can't get financial backing to complete the deals that might otherwise be made. AIG is now so deeply in trouble that some analysts have ceased to offer opinions on the company's long-term (or even short-term) outlook.
But life insurance isn't the only field in trouble; property/casualty insurer CNA was also hit with downgrades from both Fitch and A.M. Best. While there's more pressure on the life insurance industry than on such businesses as property/casualty, according to Douglas Meyer, managing director and insurance analyst at Fitch Ratings, CNA's outlook is now negative, based not only on investment losses, but also on declining net investment income because of investment losses in limited partnerships. CNA experienced a net loss in the fourth quarter of 2008, and since it has significant holdings in mortgage-backed and asset-backed securities, more rough times seem to lie ahead.
Prudential Financial has also gotten smacked. Citing Prudential's "exposure to the volatile credit and investment market conditions, which are negatively impacting its investment results, earnings performance and capital level," Fitch dropped Prudential's parent company by two notches. High debt levels at the parent holding company level are also cited as cause for concern.
Where to go from here? Down, probably, as many of the outlook ratings are also negative. According to Meyer, because one of the largest exposures is related to the corporate bond market, Fitch believes "there will be a significant increase in defaults in 2009, and that will have a significant effect on performance of these life insurance companies." Meyer suggests that the "prolonged recession" will continue throughout 2009.
With the market values of insurance companies' investments dropping, many companies losing access to capital markets, and those who still have access paying higher prices, there are plenty of problems. Fitch also foresees "the potential for material increases in reserves" for companies offering variable annuities, thanks to those products' exposure to capital markets. Fitch also anticipates further one- to two-notch drops in ratings throughout 2009, with downgrades to be greater among life insurers than among non-life companies.
Is there a bright spot in all of this? The underlying strength of the overall market, according to Meyer. "We think the industry is still relatively strong," he says, pointing out that the ratings changes expected in the near term are only one or two notches. The industry, he explains, entered the current downturn in 2008 "with a very strong capital position," positioning it well to survive in the current "difficult" environment.
Fitch also has issued the opinion that insurers have "fared better throughout the current financial crisis than other financial institutions," thanks to lower exposure to subprime assets, lower liquidity exposures, and "generally stronger balance sheets" when things started to tumble.
Marlene Y. Satter, a freelance business writer who can be reached at firstname.lastname@example.org.