U.S. credit rating downgrade's tremors reach insurance and finance sectors - SmartBrief

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U.S. credit rating downgrade’s tremors reach insurance and finance sectors

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Modern Money

Standard & Poor’s downgrade of the U.S. long-term sovereign credit rating has been felt throughout the nation’s financial system. Insurers are feeling the aftershocks — although the extent of that depends on their investment in U.S. government debt.

Five insurance companies have lost their AAA ratings. But Robert Hartwig, president of the Insurance Information Institute, said property/casualty insurers “have very limited direct exposure to the U.S. government bond market and have collectively set aside hundreds of billions of dollars to pay unanticipated claims.” Therefore, he expects the downgrade to have no real effect in the near future on the P/C insurance industry or its policyholders.

Of course, no one knows what the long-term effects of the downgrade will be. Some people still have a reason to be thankful for now — but in such a partisan time, far-fetched is the notion that the U.S. has seen the last of the behavior that led it to the downgrade.

That behavior would be the brinksmanship that S&P mentioned when knocking the U.S. down a notch in its credit rating. U.S. leaders met their Aug. 2 deadline for a budget deal, and there was much rejoicing in Washington, D.C.

But that compromise wasn’t enough for S&P, who had long warned of a downgrade. S&P showed it was willing to back up its warnings with action — and now the nation hopes the other rating agencies don’t follow suit.

U.S. officials have plenty of blame to go around, largely for those in the opposite party. Some also say that S&P’s methodology in determining the rating was erroneous, although the agency made its expectations clear before lawmakers pushed the budget compromise until the 11th hour.

Nonetheless, we’ve heard some positive remarks, including one from President Barack Obama, who said the U.S. always will be a “AAA country.” Those remarks were meant to be encouraging, but unfortunately they do little more than that now that the damage is done.