A.M. Best Revises Rating Outlook of U.S. Life/Health Companies to Negative

The severe dislocation in the capital markets, fueled most recently by the bankruptcy filing of Lehman Brothers Holdings Inc. and liquidity concerns at high-profile financial institutions, such as American International Group, Inc. (New York, NY), has prompted A.M. Best Co. to revise its rating outlook for the U.S. life insurance industry to negative from stable. This means that, in the near to medium term, A.M. Best expects to take more negative rating actions (e.g. downgrades/outlook revisions) than positive rating actions (e.g. upgrades/outlook revisions) for U.S. life, annuity and health companies. Life and annuity rating unit downgrades outpaced upgrades by an eighteen to six margin while health rating unit upgrades and downgrades were nearly even at six and five, respectively.

Although fundamentals for the vast majority of life/health companies are currently sound, uncertainty continues to be widespread in terms of the future direction of the economy, real estate values, interest rates, equity markets–both domestically and globally–and liquidity. All of these factors have had an impact on life/health insurers’ balance sheet strength and operating performance. A.M. Best believes that access to additional capital is somewhat
limited as stock prices are depressed and the liquidity crunch continues. The repricing of risk has led to large spread widening in the U.S. corporate fixed income market in a “flight to quality,” yet credit remains tight. Concurrently, the new fair value accounting standards have forced companies to take writedowns on illiquid investments, exacerbated by widened corporate credit spreads in addition to securities linked to subprime and Alt-A residential mortgages. Furthermore, credit defaults have begun to increase and many investments have experienced significant impairments and large unrealized losses.

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