US life insurers strong but wave of credit downgrades could be a worry: Moody’s
US life insurers are financially robust, but a large number of credit downgrades could reduce their capital strength.
That’s the warning from Moody’s Investors Service. The agency said that the US life insurance industry is well capitalised with a median risk based capital (RBC) ratio of 447 percent. It said insurers with a high proportion of securities at the lower end of A-rating and Baa rating are most susceptible to RBC ratio declines.
Moody’s said that applying a rating migration stress lowers the median RBC ratio by 69 points (15 percent decline), to 378 percent. Although insurance companies would still remain well capitalized relative to regulatory requirements, some companies' credit ratings would likely face downward pressure.
"For most US life insurance companies, asset risk is a significant risk included in the calculation of the RBC ratio," said Manoj Jethani, a Moody's vice president. "A sharp downward turn in the credit cycle that leads to a large number of credit rating downgrades within insurers' bond portfolios, and a corresponding rise in defaults, would reduce life insurers' capital strength."
Moody’s said that rating migration for those insurers with high concentrations of securities rated at the lower end of A-rating and Baa-rating can cause increased regulatory capital requirements relative to insurers with less exposure, reducing RBC ratios and potentially limiting insurance companies' ability to take out excess capital as dividends to service holding company obligations.
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