Triple-A rated insurers can handle a mild downgrade of U.S. debt

Four major life insurers with pristine Aaa ratings are likely to hold on to their status, provided the U.S.'s government bond rating doesn't fall by more than one rung. Strong balance sheets and underwriting skills have been a leg up for top-rated insurers New York Life Insurance Co., Northwestern Mutual Life Insurance Co., Teachers Insurance & Annuity Association of America and United Services Automobile Association, Moody's Investors Service noted in a report today. The four carriers' ratings are tied to those of the U.S. because most of their business is based in the U.S. and the majority of their investments are tied to domestic issuers. If the U.S.'s sovereign debt rating is confirmed at Aaa or cut by just one notch to Aa1, then the carriers are likely to hold on to their ratings. But if the government bond rating falls to Aa2 or further, the life carriers' ratings could fall accordingly, Moody's noted. Though life insurers are investors in government bonds, this would only be one consideration behind cutting ratings for carriers if the U.S .is downgraded, said Joel Levine, senior vice president at Moody's. “The impact isn't so much that the insurers are holding government bonds; it's more the macro environmental factors that lead to a multi-notch downgrade,” he said. High unemployment and large deficits are generally bad news for life insurers. Rising taxes for individuals would cut disposable income and make customers less willing to buy life insurance, while rising unemployment does not augur well for sales of group insurance coverage, Mr. Levine said.