Life Insurance on the Line
Credit downgrades in the sector obscure some positive aspects.
Sterne Agee
STANDARD & POOR'S DOWNGRADED the following names in our [life insurance] coverage universe last night based on the results of their recently completed incremental stress testing of bond holdings, commercial mortgages and commercial mortgage-backed securities, coupled with continued equity market declines: Hartford Financial Services Group (HIG); Lincoln National (LNC); MetLife (MET); Protective Life (PL); and Prudential Financial (PRU).
While we hardly believe the moves by S&P should come as surprising to investors, we believe there are a few key positive (Protective Life, Prudential) and negative (Hartford, Lincoln National, MetLife) takeaways from the actions:
• Hartford -- despite the one notch downgrades of the holding company to BBB+ and the insurance financial strength to A+, the ratings remain on credit watch negative, a signal that further negative ratings actions could be imminent.
• Lincoln National -- the holding company was downgraded two notches to A- while the insurance financial strength rating fell one notch to AA-. Of particular note, the holding company's short-term issuer rating was cut to A-2, which now means that Lincoln National has lost access to the Commercial Paper Funding Facility program given its Moody's short-term rating is P-2. On the positive side, Lincoln National's ratings are now on Stable outlook from S&P, but we believe loss of Commercial Paper Funding Facility access is the key takeaway.
• MetLife -- both the holding company and the insurance financial strength ratings were downgraded one notch to A- and AA-, respectively. Very surprisingly, in our view, the ratings remain on negative outlook despite the downgrades. Given MetLife's strong liquidity profile at both the holding company and the operating companies, we find this very surprising, especially relative to the Stable outlooks for Lincoln, Protective Life and Prudential. We note that MetLife's short-term issuer rating was cut to A-2 which leaves it split-rated from the three major rating agencies. However, MetLife Funding, which is MetLife's primary commercial paper conduit, remains A-1+.
• Protective Life -- both the holding company and the insurance financial strength ratings were downgraded one notch to A- and AA-, respectively. Overall, we believe investors may react favorably to this one notch downgrade, especially given S&P's ratings for Protective Life are on Stable outlook.
• Prudential -- the holding company's ratings were unchanged at A and the negative outlook was changed to Stable. The holding company's short-term issuer rating remains A-1. The insurance financial strength rating was downgraded one notch to AA- with a Stable outlook, and Prudential Funding, which is Prudential's primary commercial paper conduit, remains at A-1+ following the ratings actions.
Aflac (AFL) remains on credit watch negative. No actions were taken on Aflac's ratings. The holding company remains A- and the insurance financial strength rating remains AA-, both on credit watch negative, which is a signal that further negative ratings actions could be imminent as S&P works to complete a near-term review.
Principal Financial Group (PFG) is unaffected. No actions were taken on Prudential Financial Group's ratings, which were recently downgraded one notch to A- for the holding company and AA- for the insurance financial strength. Ratings remain on negative outlook.
Torchmark (TMK) is unaffected. No actions were taken on Torchmark's ratings. The holding company remains A, the short-term issuer rating remains A-1 and the insurance financial strength ratings remain AA-, all of which are on negative outlook.
-- John Nadel |
