On 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.”
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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”.
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By GlobalDataThe 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.
