A.M. Best Briefing: U.S. Economy - P/C Sector Steady, Life Industry More Vulnerable

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OLDWICK, N.J.--(BUSINESS WIRE)-- Over the past few months, A.M. Best Co. has grown increasingly concerned with the heightened level of global economic uncertainty. Continuing economic weakness in certain European countries and the debt crisis in the United States have elevated the risk profile of U.S. insurers. The hard-won agreement between Congress and the Obama administration to increase the U.S. debt ceiling averted a default by the U.S. government, but the deal falls short of erasing all uncertainty as to the credit quality of U.S. sovereign debt. Though A.M. Best does not employ a sovereign ceiling, sovereign debt downgrades are a factor taken into consideration when assessing the financial strength of an insurer.

Recent stress testing undertaken by A.M. Best Co., as detailed in the Best’s Briefing Sovereign Debt Pressure Spreads to Insurers’ Balance Sheets (July 18, 2011), considered the possibility of a sovereign rating downgrade, albeit more severe than what has occurred to date. But regardless of the severity, the luster of U.S. Treasury securities as a virtually risk-free investment has been tarnished. Nevertheless, they remain a necessary mainstay of insurers’ portfolios, especially for life companies. Meanwhile, broader macroeconomic concerns that were part of A.M. Best’s stress scenario loom as large as ever.

For property/casualty (P/C) rating units, the estimated impact of the economic stress scenario on balance sheet strength as measured by Best’s Capital Adequacy Ratio (BCAR) was an average decline of approximately 47 points. A.M. Best estimates that less than 2% of all P/C rating units potentially could have seen their ratings impacted by the stress scenario.

Stress testing had a more significant impact on life/annuity (life) BCAR ratios. On July 19, 2011, A.M. Best indicated that it was considering a revision in the rating outlook for the U.S. life/annuity sector to negative from stable. Given reports of continuing economic weakness, the likelihood of such a change in outlook in the near term remains elevated. A.M. Best will continue to review each company on a case-by-case basis and take rating actions accordingly.

To download a copy of this briefing at no charge, please visit www.ambest.com/press/BEST’SBRIEFINGSOVEREIGNDEBT.pdf.

For a video discussion with Anthony Diodato and Ken Frino of the issues addressed in the briefing, please visit http://www.ambest.com/media/media.asp?RC=190600.

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

CONTACT:

A.M. Best Co.
Anthony Diodato, 908-439-2200, ext. 5704
Group Vice President
anthony.diodato@ambest.com
or
Ken Frino, 908-439-2200, ext. 5012
Group Vice President
kenneth.frino@ambest.com
or
Chris Sharkey, 908-439-2200, ext. 5159
Business Analyst
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com