Tuesday, December 3, 2013

No. 11: More on the Dilemma for Consumers When an Insurance Company Is Sold

In the December 2013 issue of The Insurance Forum, published November 7, I wrote about the dilemma faced by policyholders when an insurance company is sold by its parent company in such a way as to cause a downgrade in the insurance company's financial ratings. In the article I cited the recent divestitures of Aviva Life & Annuity Company by Aviva plc and Lincoln Benefit Life Company by Allstate Life Insurance Company. I suggested that the problem would be alleviated if rating firms assign stand-alone ratings to the subsidiary unless the parent company provides an unlimited, permanent, and unconditional parental guarantee to the subsidiary.

Moody's Special Comment
On November 20, Moody's Investors Service, a major rating firm, issued a six-page "Special Comment" entitled "US Life Insurance: Recent Divestitures Raise Questions about Parental Commitment." Moody's cited five recent divestitures in addition to the two I cited: Sun Life Assurance Company of Canada US by Sun Life Financial, MONY Life Insurance Company and MONY Life Insurance Company of America by AXA Financial, and Commonwealth Annuity & Life Insurance Company and First Allmerica Life Insurance Company by Goldman Sachs Group. Here is the opening paragraph of the special comment:
Insurance subsidiaries' creditworthiness often benefits from implied support stemming from a unit's strategic importance to a stronger parent and/or group of other operating subsidiaries that are managed as a tightly integrated group. This implied support has been validated in practice over time and is typically reflected in higher ratings for those subsidiaries than they would merit on their own. However, recent subsidiary dispositions, most prominently in the US life insurance sector, raise new questions about the reliability of this implied support over time as parent strategies change.
An Interesting Table
The special comment includes an interesting table listing eleven U.S. life insurance companies that receive "rating uplift" from their parent companies. Here are the companies, with the number of "notches of rating uplift" in parentheses: Allianz Life Insurance Company of North America (1), Allstate Life Insurance Company (2), AXA Equitable Life Insurance Company (2), Combined Insurance Company of America (1), Great-West Life & Annuity Insurance Company (1), Hartford Life Insurance Company (1), HCC Life Insurance Company (1), Jackson National Life Insurance Company (1), John Hancock Life Insurance Company USA (1), USAA Life Insurance Company (1), and Zurich American Life Insurance Company (2).

In the concluding section of the special comment, Moody's says "implicit support may lack permanence" and "shifts in strategic importance of subsidiaries can result in rating transitions." However, Moody's does not mention the possibility of a subsidiary obtaining an unlimited, permanent, and unconditional guarantee from its parent. I will provide the special comment in the form of a complimentary PDF. Just send me an e-mail request for Moody's special comment on recent divestitures.