The Virginia Verdict Review

Comprehensive and Informative Commentary on State and Federal Legal Matters

Decline in S &P’s Ratings Warrants Review of Estate Planning Practices

As was reported in last week’s edition of The Insurance Journal, everyone’s favorite credit rating company, Standard and Poor’s, has decided to downgrade the credit ratings of 10 of the U.S.’s most prominent life insurance providers.  While many of the companies have enjoyed a AAA rating (the highest possible) for a number of years, last week’s adjustments have left the majority of them at a AA+ level, with a negative outlook assigned as well.

While S&P’s most recent actions have sparked yet another round of controversy and outrage, further investigation reveals that this series of downgrades might not be as detrimental as many believe.  In fact, S&P’s reps have made efforts to clarify that their decision to downgrade 5 of the U.S’s top companies and their affiliates has nothing to do with their opinion of the companies.  Rather, the downgrade is just a reflection of the U.S.’s credit ranking as a whole.  Since most of these companies–which include Knights of Columbus, New York Life, Northwestern Mutual, Teachers Insurance & Annuity Assoc. of America (TIAA), and United Services Automobile Assoc. (USAA)–invest over 70% of their assets in U.S. treasury bonds, it follows that their ranking is highly tied to the ranking of the U.S. as a whole.  As one S&P’s rep put it:

“The rating actions reflect the application of criteria and our view that the link between the ratings on these entities and the sovereign credit ratings on the U.S. could lead to a decline in the insurers’ financial strength. This is because these companies’ businesses and assets are highly concentrated in the U.S.”

Given this understanding, some of the more vicious attacks of the Standard and Poor’s and its practices seem a bit overzealous.  However, as the old adage goes, “victory favors preparation.”  The simple fact that many Virginians use life insurance as an investment vehicle means that this change warrants particular attention.  While it might not be a reason for panic, S&P’s actions are, at the very least, reason enough to revisit and reexamine your current investment and Estate Planning situation.


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