Moody’s has warned that US life re/insurers face the potential for rating downgrades due to pandemic-related exposures in their fixed income investment portfolios.
The rating agency noted that many insurers have significant exposures in consumer sensitive sectors that have been heavily affected by coronavirus related shutdowns and laggard demand.
Airlines, restaurants, lodging, leisure, automotive and oil and gas prices have all been hard hit by the pandemic, and life insurers have a high share of total corporate bonds rated Baa tied to these sectors, especially to oil and gas.
“Although diversification somewhat mitigates the potential risk of higher downgrades and defaults, it is not a substitute for quality of investments,” said Moody’s Vice President Manoj Jethani.
“Rating downgrades not only indicate a higher probability of default, but also weaken the capital adequacy of US life insurers.”
For US life insurers, ratings transition risk is amplified by their tally of over $131 billion of total corporate bonds in oil & gas, which are mostly rated Baa.
Given the uncertainty surrounding the pace of demand recovery in consumer sensitive sectors and the possibility of downside scenarios, Moody’s cautioned that capital ratio and asset quality will likely weaken from further rating downgrades.
Downgrades soared for global oil and gas companies in the first half of 2020, and energy-related asset value fell for some insurers, with further declines possible.
These insurers have reported unrealized losses on these investments in the first half of 2020 and in some instances there have been impairments of lower-rated holdings.
However, federal stimulus and rising oil & gas pricing in the third quarter has led to improvement in insurers unrealized losses in oil & gas, Moody’s noted.