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August 30, 2011updated 13 Apr 2017 8:48am

S&P takes a dim view on the US

Commenting on its decision, S&P said in a statement: "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilise the governments medium-term debt dynamics With the US sovereign debts downgrade also went a downgrade by the rating agency to AA of the long-term counterparty credit and financial strength ratings of the five US insurers that had held the coveted AAA rating

By LII editorial

Table showing exposure to US government debtOn 5 August, Standard & Poor’s (S&P) sent a shockwave through global financial markets when it announced that it had downgraded US sovereign debt a notch, from AAA to AA+.

Commenting on its decision, S&P said in a statement: “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government’s medium-term debt dynamics.”

With the US sovereign debt’s downgrade also went a downgrade by the rating agency to AA+ of the long-term counterparty credit and financial strength ratings of the five US insurers that had held the coveted AAA rating.

The five insurers which saw their AAA ratings cut to AA+ and their outlook altered from stable to negative are: Knights of Columbus, New York Life, Northwestern Mutual Life Insurance, Teachers Insurance & Annuity Association of America and the United Services Automobile Association.

In its statement, S&P noted that the US sovereign credit rating “constrains the long-term ratings on these US insurers”. In a report published in July this year, S&P noted that the five former AAA-rated insurers have “significant holdings” of US Treasury and federal agency securities equal to about 60% of their total adjusted capital each at the end of 2010.

Despite this high exposure, S&P noted in its statement on the five downgraded insurers and the five that retained their AA+ ratings, that they have “very strong financial profiles” and “favourable business profiles”.

The rating agency also stressed: “Our view of these companies’ fundamental credit characteristics has not changed. Rather, the rating actions reflect the application of criteria, and our view that the link between the ratings on these entities and the sovereign credit ratings on the US could lead to a decline in the insurers’ financial strength. This is because these companies’ businesses and assets are highly concentrated in the US.”

The five downgraded insurers joined five other insurers previously rated AA+ by S&P: Assured Guaranty, Berkshire Hathaway, Guardian Life Insurance, MassMutual and Western & Southern Financial Group. The outlook for these four insurers was revised from “stable” to “negative” by S&P.

Berkshire Hathaway chairman Warren Buffet lambasted S&P for its decision to downgrade US sovereign debt.

Buffet was widely quoted in the US media as saying in his inimitable style: “If there were a quadruple-A rating, I’d give the US that.”

Commenting in a statement on the downgrade of US sovereign debt by S&P, National Association of Insurance Commissioners president and Iowa insurance commissioner Susan E Voss said: “There is no impact on insurer investments in US 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.”

Looking ahead, S&P warned: “The outlook on the long-term [US debt] rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period, result in a higher general government debt trajectory than we currently assume in our base case.”

S&P is alone in its ultra-harsh stance. On 9 August, Moody’s Investor Services affirmed the US’s rating at Aaa (equivalent to S&P’s AAA rating). Moody’s noted that the dollar as the world’s major reserve currency underpins the US’ top credit rating as does the economy’s “unparalleled size and diversity” and “political and institutional stability”.

Rating agency Fitch is expected to release its assessment of US sovereign debt at the end of August.

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