The News Journal

OPINION • Written by KAREN WELDIN STEWART • Delaware Voice • August 21, 2011

As Delaware's insurance commissioner, I have the statutory duty to ensure the financial solvency of the 135 insurance companies domiciled in the First State.

This month's downgrade by Standard & Poor's of the U.S. long-term sovereign credit rating has worldwide consequences. Fortunately, the downgrade has not negatively affected the financial solvency of insurers and their ability to pay claims.

The insurance industry's exposure to U.S. government securities is significant. As of Dec. 31, 2010, the industry had a total exposure of $675.6 billion of U.S. government and government-related debt. When Standard & Poor's first mentioned the possibility of a downgrade earlier this year, I directed my staff to consider the consequences of such an event.

Following the passage of the Budget Control Act of 2011, Moody's confirmed the AAA government bond rating of the United States , but assigned a negative outlook to the rating. Moody's commented that the initial increase of the debt limit combined with a commitment to raise it further by year-end have "virtually eliminated the risk" of default on the U.S. government's debt obligations.

Fitch Ratings commented that "the risk of sovereign default remains extremely low" but the United States "must also confront tough choices on tax and spending against ... if the budget deficit and government debt is to be cut to safer levels." Fitch has been conducting a previously scheduled review of the United States' AAA sovereign rating and expects to conclude the review by the end of August.

The insurance industry's exposure to the U.S. government and government-related debt has a number of components, including U.S. Treasury and direct issues by federal agencies and securities issued by government-sponsored enterprises like the Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Company (Freddie Mac). Life insurance and property/casualty insurance companies held $629.7 billion, or 93.1 percent of the total $676.6 billion outstanding exposure, with life insurers representing $411.6 billion, or 60.8 percent, and property/casualty insurers representing $218.1 billion, or 32.3 percent.

The life insurance companies' exposure represents 12.5 percent of the life insurance industry's total invested assets; the property/casualty insurance companies' exposure represents 13.6 percent of the property/casualty insurance industry's total invested assets. Health, fraternal and title insurance companies held a total of $46.9 billion, or 6.9 percent of the total outstanding exposure.

Insurance regulators in the United States rate investments from 1 (the best) to 6 (the worst). U.S. Treasuries, Ginnie Mae pass-throughs, and Fannie Mae and Freddie Mac direct obligations receive a 1 designation. This designation is partly attributable to the fact that the U.S. government has never defaulted on its obligations, and there is no indication it will do so. Consequently, there is no impact on insurer investments in U.S. government securities from the downgrade.

Karen Weldin Stewart is Delaware's insurance commissioner.