What is the impact of the S&P downgrade from AAA to AA for the structured settlement profession?

In what we can assume will be the first of several down grades for major life insurance companies in the structured settlement markets, S&P quickly down graded five premier life insurance companies yesterday from AAA to AA+.  The companies who were impacted by this are:

New York Life was dropped to a AA+

Northwestern Mutual Life Insurance was dropped to a AA+

USAA was dropped to a AA+.

Knights of Columbus was dropped to a AA+.

Teachers Insurance and Annuity. TIAA, was dropped to a AA+.

So what exactly does this mean and what are the implications for the life insurance industry and structured settlements in general? I address some of the concerns in this weeks video broadcast of Speaking of Settlements but in short the impact should be minimal other than to the pride of the companies listed above.

It is a sickening process in that each of those five firms went to great lengths over the last three years to do the things needed to retain a coveted AAA rating and in some cases make it a key element of their marketing campaigns, only to suffer this immediate down grade as a result of the fact that they hold a large portion of US government obligations precisely because they are so conservative and careful.

As I have been saying for years, our industry uses these ratings at our peril as the rating firms really could care less about the impact of their down grades on companies marketing and reputations and the idea of using S&P as a rating agency for life markets has been a bad idea for decades. I have always preferred AM Best as the best source of information on insurance company standards and solvency and they are not as reactive as the other firms.

Enjoy today’s video on the S&P down grade and it’s impact on the insurance and structured settlement profession, but it would be wise to stop using rating agency rankings as some sort of validation of safety and instead do your own research on markets and firm to match the right company to the right risk.

Comments

[nick]

I really struggle to decide what analysis is correct on this downgrade as well. It appears as though the long lasting effects of future downgrades could significantly impact overall investor health (which, many people forget, wall street IS main street - -all our 401k's, etc. are tied to its overall success) in a negative manner. But I agree with you, AM Best seems to be a more stable indicator of overall health, its not as if the U.S. will actually stop paying any bills, so the downgrade, although just because of the enormous debt load, is unjust as it relates to the U.S's ability and guarantee of continuing payment on its debt.
Liked the video, thanks!