Life Insurers’ Woes Worsen

Life insurers have suffered frequent rating downgrades from all key rating agencies in the past few weeks. Yesterday, S&P again lowered its counterparty credit ratings on 7 U.S. life insurance holding companies, including Genworth Financial (GNW), Hartford Financial Services Group (HIG), Lincoln National Corp. (LNC), MetLife Inc. (MET) and Prudential Financial (PRU). For HIG, it was the 3rd downgrade by S&P in a month.

Lower ratings mean higher costs, and in some cases, even loss of business - further worsening the situation for these companies.

The rating downgrades have mainly resulted from lower operating earnings, high investment losses and reduced financial flexibility. The group’s earnings are heavily correlated to the equity markets, particularly within the variable annuity businesses, and have suffered badly as a result of stock market declines. Rating agencies are also concerned about capital requirements associated with the companies’ variable annuity businesses.

Further, most life insurers are heavily exposed to Commercial Mortgage Backed Securities (CMBS), which have resulted in increasing losses in the investment portfolio, as the downturn in the Commercial Real Estate pricing has escalated.

All the above factors have resulted in the very challenging environment for the life insurers, and have badly affected their ability to generate profitable business in the coming quarters.

As the economic environment continues to deteriorate, the group’s risk-based capital position - as well as the ability to raise capital - has deteriorated. Some of these companies are trying to raise capital through the Troubled Assets Relief Program (TARP) but have not got any confirmation from the Treasury so far.

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