Recent divestitures of U.S. life subsidiaries by several insurance firms, including the sale of its U.S. division by Sun Life Financial Inc., is raising questions about implied parental support in the credit ratings for this industry, says Moody’s Investors Service in a new report.
The rating agency notes that, over the past year, five companies have sold off U.S. subsidiaries, whose accredit ratings benefited from implicit support by the parent company. This includes sales by Sun Life, Aviva Life & Annuity Co., MONY Life Insurance Co., Lincoln Benefit Life Insurance Co., and Global Atlantic Life.
Moody’s says this trend challenges the notion of “strategic subsidiary”, and the extent of rating uplift from implicit parental support, “as the strategic importance of subsidiaries can lack permanence”.
Additionally, it notes that the real strategic importance of subsidiaries is tested when risks in these companies increase; returns are inadequate, or below expectations; or, the parent company decides that capital may be better used in other areas, to grow higher priority businesses, or to improve its financial profile.
The report notes that Moody’s continues to rate a number of U.S. life insurance companies above the level justified by their own intrinsic credit profile, based on their strategic importance to their owners. And, it says that while it continues to see U.S. life subsidiary rating levels as appropriate, it anticipates “continued pressure on these firms to justify their ongoing financial and strategic value to their respective parent companies.”