Moody's: Increase in capital rules is credit negative for U.S. life insurers

By Warren S. Hersch

November 02, 2012 at 09:35 AM

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A major credit rating agency forecasts a negative outlook for U.S. life insurers.

Moody's Investors Service labels the credit outlook for U.S. life insurers as "credit negative" in the Nov. 1 edition of "Credit Outlook," a weekly publication covering credit implications of current events.

Underpinning the adverse rating, Moody's states in the report, is an increase in the National Association of Insurance Commissioners' capital requirements for U.S. life insurers. The change in capital requirements are driven by year-end NAIC assumptions respecting residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS).

Offsetting the benefits of the new capital requirements, the Moody's report adds, are disincentives for insurers to invest in two of the better-yielding asset classes in a low-yield environment.

The NAIC's preliminary estimate of the industry-wide effect for U.S. life insurers of the new weightings is for NAIC risk-based capital (RBC) to increase to 3.2 percent from 2.7 percent for RMBS and to 1.0 percent from 0.9 percent for CMBS.

"The higher capital requirements, which will affect insurers in their preparation of year-end 2012 statutory statements, are credit positive for the capital adequacy of the insurance industry," Moody's states in the report. "However, the additional capital requirements will increase the amount of capital for insurers to hold RMBS and CMBS relative to other investments.

"That increase may discourage insurers from maintaining existing holdings in these asset classes and from making future purchases," the report adds.

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