Life Insurance Sector Faces The Prospect Of Further Downgrades
Fitch Rating Services released their mid-year report on the life insurance sector this week and the news is not favorable for the life insurance sector. Feeling the pressure on their capital reserves from the decline in equity markets, while at the same time locked into guaranteed contracts from annuities, they face the prospect of further credit downgrades through the end of the year.
While many analysts feel the sector is still sufficiently capitalized, liquidity issues that would arise from credit downgrades are a cause of concern. After much debate the government finally made available TARP to insurers earlier in this year but while that is the case, the bulk of the remaining funds are still earmarked for the banking system.
Last month The Hartford became the first insurer to take up the government’s offer by accepting $3.4 billion in capital in exchange for an equity stake. Many insurers would like to avoid this situation if at all possible, if only for the negative reaction it would cause to stock values.
Further credit downgrades may leave some with little choice in the matter, as the impact to liquidity could force them to ask for funds in exchange for shear survival. AIG is probably the best example, although the financial crisis has pretty much been banking related, credit downgrades forced them to ask the government for hundreds of billions of dollars in order to meet the collateral requirements those same downgrades required.
Although equity markets have staged a mini-rally this month, investment values still remain sharply down from a year ago and while many are claiming the recession is almost over, no one knows for certain if that is the case.
