Swiss Life's Rating Cut By Fitch Bodes Ill For Peers
July 23 2009 - 8:37AM
Dow Jones News
Rating agency Fitch on Thursday cut Swiss Life Holding AG's
(SLHN.VX) credit grade as concerns increase about the deteriorating
business environment and weak financial markets.
This, analysts say, could bode poorly for other life insurers
that are also struggling with the recession and low interest rates,
which can cut deeply into both policy sales and financial
returns.
Fitch cut Swiss Life's credit rating to Triple-B from
Triple-B-plus and put the outlook on the insurer's rating at
negative due to "unfavorable interest-rate movements and the
potential for the economic downturn."
One of Fitch's major concerns is the company's weakening
embedded value, which reflects an insurer's future profit and
revenue streams. This figure was hurt in 2008 because of the
investment guarantees on some of Swiss Life's insurance and savings
policies.
These investment guarantees mean that Swiss Life, like many
other European and U.S. insurers that sell products such as
variable annuities, must pay policyholders a specific investment
return irrespective of the financial market situation.
If financial markets are weak, the risk of investment losses
rises. This can eventually hurt an insurer's capital, which is
important for any insurer to do business because it must have
equity and cash reserves to back up any policies it writes.
Generally, interest rates decline in a weak economy. Much of an
insurer's investment income is linked to interest-bearing
products.
"Future profits of the company are highly sensitive to further
interest-rate drops and losses on equity and property," said Clara
Hughes, associate director in Fitch's insurance team. A 100-basis
points drop in interest rates could hurt embedded value
substantially, she added.
Swiss Life, which declined to comment on the rating action,
isn't isolated with this risk. Many of its peers are struggling
with similar problems as they have promised customers stable
investment returns even in times of crisis.
At an investor conference in June in New York, insurance
executives were aware of the challenge. Steven Kandarian, chief
investment officer of MetLife Inc (MET), warned that a prolonged
period of low interest rates could "cause problems and wreak havoc"
for a life insurance company.
For this and other market-related risks, Standard & Poor's a
put negative outlook on the U.S. life insurance sector in October
2008, when financial markets sagged in the wake of the Lehman
Brothers collapse.
Analysts fear that if interest rates remain at current subdued
levels, life insurers will have difficulty producing enough
investment returns to satisfy customers. In such a scenario,
premium growth is likely to be hurt.
Also, insurers could be tempted to take bigger financial market
risks and could thus face huge asset write-downs in the event of
sliding equity and bonds prices, analysts said.
During the current financial crisis, most insurers have avoided
taking high equity and bond risks, something that could change
should a low-interest-rate environment tempt insurers to pursue a
riskier path.
At 1305 GMT, the Stoxx Europe 600 Insurance index was down
fractionally, underperforming the banking index, which was up 1%.
The banking sector got a lift Thursday as Credit Suisse Group (CS)
followed competitors such as Goldman Sachs Group Inc. (GS) and
JPMorgan Chase & Co. (JPM) with a strong set of second-quarter
earnings.
-By Goran Mijuk, Dow Jones Newswires, +41 43 443 80 47;
goran.mijuk@dowjones.com