MOODY'S LIKELY TO INCREASE RATING DIFFERENTIAL BETWEEN U.S. LIFE INSURANCE OPERATING AND HOLDING COMPANIES
New York, May 22, 2002 -- In a soon-to-be released special report, Moody's Investors Service says it is likely that it will increase the rating gap from two to three notches between the Insurance Financial Strength Ratings (IFSR) of several US life insurance operating companies and the senior debt rating at their holding companies in the coming months. These ratings adjustments will be driven primarily by a change in Moody's rating methodology that increasingly emphasizes expected loss.
"The changes to Moody's methodology for life insurers and their holding companies achieves greater consistency and comparability with Moody's firm-wide initiatives to increasingly move the meaning of our ratings towards a modified expected loss framework," says Robert Riegel, managing director of the rating agency's life insurance team. At present, the average IFSR rating of life insurance operating companies is Aa3/A1, while senior debt at the holding company averages A2/A3.
The rating agency's decision to change its notching - which refers to the general practice of making rating distinctions among the different liabilities of a single entity or of closely related entities - was prompted by its previous analysis of life insurers' historical default rates and loss-given-default data compared to Moody's corporate bond default data. The study concluded that US life insurers perform favorably on both measures compared to the corporate bond averages.
"In stark contrast to modest policyholder losses, expected creditor losses at the holding company in a default situation tend to be very large," says Riegel. Holding company debt holders are likely to receive little or no recovery from a default unless policyholders have received close to a full recovery of their obligations. The net result is that while the probability of default of a life insurer and its parent holding company can be expected to be highly correlated, expected losses could be significantly higher at the holding company.
In the coming months, it is likely that Moody's will increase the number of rating notches between the IFSR at the operating company and the senior debt at the holding company from two to three notches for the following life insurance groups: AFLAC, Delphi Financial Group, Jefferson-Pilot, MetLife, Ohio National Financial Services, Presidential Life, Principal Financial Services, Protective Life, Reinsurance Group of America, Torchmark, and UnumProvident.
The change in rating methodology has already resulted in wider notching spreads between operating company IFSRs and holding company debt ratings for some other insurance groups.
"Rating adjustments will either result in an upgrade of the operating company's IFSR or a downgrade of the holding company's senior debt, depending on the specific circumstances and analysis of each company," says Riegel. These decisions will be made on a case-by-case basis and can be influenced by other fundamental shifts in credit quality of the insurer.
Moody's says that it is important to recognize that the rating adjustments for these companies will primarily be driven by the rating methodology change, and not necessarily by changes in Moody's views of the credit fundamentals of these firms. The notching change will not result in significant changes to existing ratings in this sector absent fundamental improvements or declines in credit quality.
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