S&P Takes Action on Insurance Groups Following U.S. Sovereign Downgrade

Fallout from the Standard & Poor’s Ratings Services lowering of its long-term sovereign credit rating on the United States of America to ‘AA+’ incudes rating agency action on 10 U.S.-based insurance groups.

Effective August 8, 2011 S&P lowered to ‘AA+’ from ‘AAA’ its financial strength ratings on the member companies of five U.S. insurance groups:

1. Knights of Columbus
2. New York Life  (issues structured settlement annuities)***
3. Northwestern Mutual
4. Teachers Insurance & Annuity Assoc. of America (TIAA)
5. United Services Automobile Assoc. (USAA)    (issues structured settlement annuities)

S&P assigns an outlook on the ratings on all of these companies to negative.

Concurrent with the above action, Standard & Poor’s affirmed the ‘AA+’ financial strength ratings on the members of five other insurance groups

• Assured Guaranty  (municipal bond insurer)
• Berkshire Hathaway (current structured settlement annuity issuer and guarantors in group)
• Guardian
• Massachusetts Mutual  (former structured annuity issuer)
• Western Southern — and revised the outlooks on ratings on these companies to negative from stable.

The 10 insurance groups operate in the U.S. and generally have significant holdings of U.S. Treasury and agency securities. For the insurers with the most exposure, these investments constituted as much as 200% of total adjusted capital at year-end 2010, according to S&P. S&P dropped its rating on United States soverign debt from "AAA" to "AA+" on August 5, 2011.

S&P opined "very strong financial profiles and favorable business profiles support the ‘AA+’ ratings on the 10 affected U.S. insurance groups. In our view, these companies maintain very strong capital and liquidity. In addition, we believe that the significant retail insurance liabilities–such as whole life insurance and deferred annuities–that some of these companies have are less prone to withdrawals or surrenders than institutional liabilities.”

Susan E. Voss, president of the National Association of Insurance Commissioners and Iowa Insurance Commissioner said the following in response to the Standard & Poor's ratings action:

“There is no impact on insurer investments in U.S. government and government-related securities from the actions recently taken by the rating agencies. Risk-based capital and asset valuation reserves are unaffected. State insurance regulators and the NAIC will consider changes to our regulatory treatment if it becomes necessary in the future

***By comparison, it should be noted that on June 16, 2011 A.M. Best Co affirmed the financial strength rating of A++ (Superior) and issuer credit ratings (ICR) of "aaa" of New York Life Insurance Company at a time when the possibility of an S&P downgrade was already" on the table".