Rating Agencies Offer Industry Snapshot

Several interesting reports issued within the past week by rating agencies offer a snapshot of how the industry is faring in the current economic environment.

A recent report from Moody’s Investors Service, New York, asks the question a lot of us are asking: “Are Insurers and Investment Managers on the Road to Recovery?”
There is both good and bad news, according to the Aug. 3 report by Moody’s. While market access has rebounded quite a bit from the fall of 2008, there are still challenges and there is no guaranty that a rebound can be sustained.

The report notes that government interventions have contributed to the stabilization of the investment markets; insurance industry capitalization is starting to improve following a rebound in the markets which have “dented” portfolios; but this improvement remains vulnerable.

Of the North American life insurance industry, Moody’s says that while things are improving of late, the industry still faces an “uphill battle” due to “volatile equity markets, heightened fixed income impairments, and potentially troubled commercial real estate investments.”

The mixed view of what insurers face is exemplified by the situation for variable annuity writers. Equity markets have improved, removing some of the pressure for VA writers but many writers are “still coping with “older blocks of mispriced or underhedged business” and insurers must still contend with the impact of low interest rates, according to Moody’s.

Another market factor that insurers will face through 2010 is exposure to asset impairments and losses from investment grade bonds and commercial mortgages, Moody’s continues.

The North American property-casualty and reinsurance markets have been the least affected by the recent economic crisis, Moody’s continued. Consequently, the report says, downgrades have been modest to date. Rather, most pressure has come from natural disasters such as hurricanes, the report adds.

However, P-C companies with diversified operations have felt the impact of a down economy to a greater degree than pure plays, according to Moody’s. Commercial line insurers, the rating agency says, have a negative outlook reflecting slightly negative pricing and thinner economic cushion in insurers’ claim reserves and “somewhat weakened” capital adequacy levels.

The rating agency also says that “Personal lines insurers have likewise faced some capital strain from catastrophe and investment-related losses, but these concerns have remained offset by their stronger risk-adjusted capitalization levels, and by more responsive pricing in personal lines.”

While the U.S. healthcare insurance sector regained some earnings traction in the first half of this year, Moody’s says, it still faces challenges such as an economic environment that will hinder membership growth and the uncertainty of federal regulatory changes.

Financial guarantors, Moody’s says, remains under “substantial stress” as losses on residential mortgages continue to increase. And, it continues, other insured sectors such as CMBS could become major loss contributors.

Separately, Standard & Poor’s Corp., New York, said that “significant operating losses have applied downward pressure on mortgage insurers’ capital adequacy ratios.” That trend is expected to continue through 2010, according to S&P. The rating agency notes that in the past 27 months six private mortgage insurers rated by S&P had “statutory net losses of $8.7 billion, wiping out $4.0 billion in 2006 and 2005 industry earnings.”

S&P says that although mortgage insurers have “significant claims-paying resources,” companies will have to “pay tremendous amounts of claims in the next few years.” Consequently, the rating agency continues, “mortgage insurers' ratings range from the high end of speculative grade to the low end of investment grade.”