US insurance regulators and company executives have rushed into damage control mode following Standard & Poor’s downgrade of US Federal Government debt, reassuring consumers and markets that the decision will have little impact on the nation’s property and casualty (P&C) insurers.

The Insurance Information Institute (III) says US P&C insurers have very limited direct exposure to their government’s bond market and have hundreds of billions of dollars to pay unanticipated claims.

III President Robert Hartwig says these factors will enable the industry to operate effectively despite the downgrade of long-term government bonds.

Some insurers were affected directly when the downgrade was passed onto their credit ratings.

Standard & Poor’s downgraded long-term counterparty credit and financial strength ratings on five AAA-rated US insurers, reducing them by a notch to AA+ with negative implications.

Their short-term debt ratings were unaffected.

Another five insurers who already had an AA+ rating, including Berkshire Hathaway, had it affirmed but their outlook was cut from stable to negative.

Berkshire Hathaway Chairman and CEO Warren Buffett told Fox Business News the decision on government debt did not make sense and he was not planning to sell the company’s $US40 billion ($38.5 billion) holding of US Treasury bills.

The AAA-rated insurers would have expected the downgrades as S&P said last month it was putting them on creditwatch.

“We view the long-term ratings on the US insurers to be constrained by the US sovereign credit rating because their businesses and assets are highly concentrated in the US,” it warned then. 

The downgrading prompted regulators to issue statements defending the industry.

California’s Insurance Commissioner Dave Jones noted AA+ is still a very strong financial rating and does not affect insurers’ ability to pay claims.

National Association of Insurance Commissioners (NAIC) President and Iowa Insurance Commissioner Susan Voss assured consumers there is no impact on insurer investments in US government and government-related securities from the actions recently taken by the ratings agencies. “Risk-based capital and asset valuation reserves are unaffected.” 

Joe Robles, President and CEO of United Services Automobile Association, which lost its top rating, told clients the business is thriving. “We manage our financials conservatively. We prudently manage our risks.”

Dr Hartwig says P&C insurers held $US860 billion ($828 billion) in bonds at December 2010 and US Federal Government bonds comprised $US80 billion ($77 billlion) of this.

The insurers’ total invested assets, including cash, totalled $US1.3 billion ($1.25 billion), so Federal Treasury bonds accounted for only 6% of their assets.

In theory, the yield, or interest rate, on new government bonds should rise following the downgrade to reflect a higher risk of holding them, and this should make the value of existing bonds fall. But Dr Hartwig says the impact on insurers should be “modest and manageable”.

“Investment income is a comparatively small part of P&C insurer revenues when compared to the monies these insurers generate via premiums,” he said.

“Policyholder premiums paid to P&C insurers have totalled anywhere from $US425 billion to $US450 billion ($409 billion to $433 billion) each year since 2003, with net investment gains ranging from $US31 billion ($29.8 billion) to $US64 billion ($61.5 billion) annually within this same timeframe.”

Dr Hartwig says premiums generally cover P&C insurer claims in any year, and “even if there were a drop-off in US government bond income it would have an insignificant effect on insurers’ ability to pay claims and expenses”.