Fitch Comments on U.S. Life Insurance Exposure to Subprime Markets

CHICAGO--()--Fitch's review of the general account investment portfolios for U.S. life insurers indicates that direct exposure to problematic subprime and Alt-A residential mortgage collateral is relatively limited in the aggregate and largely concentrated in the high investment-grade securities with significant structural protection.

Further, and more importantly, Fitch has found that there are no individual U.S. life insurers with a direct exposure that would be considered a credit issue. Consequently, Fitch has not taken any negative rating action on any U.S. life insurer due to subprime-related credit issues in 2007 to date.

Subprime exposure for U.S. life insurers is concentrated in investments in RMBS, CDOs and other ABS that are backed by residential mortgages. The industry has limited exposure to subprime through investments in real estate exposed companies, such as mortgage originators or asset managers, and through investments in so-called 'alternative investments,' such as hedge funds with subprime concentrations.

'Fitch's review of U.S. life insurers' subprime exposure leads us to conclude that the industry's exposure is manageable. Subprime-related investments account for 1.9% of the industry's general account invested assets. Further, over 93% of subprime-related fixed income securities held by life insurers are rated 'AAA' or 'AA', which provides significant structural protection to higher-than-expected mortgage defaults. Industry exposure to subprime investments rated 'A' or below accounted for 2.1% of total adjusted statutory capital,' said Douglas Meyer, a Managing Director in Fitch's U.S. Insurance group. 'Our primary concern at this point is the risk that deterioration in the residential mortgage market will spill over into other sectors of the credit markets.'

The Special Report now available, 'Fitch Views Subprime Mortgage Exposure for U.S. Life Insurers as Manageable,' summarizes Fitch's views and provides detailed information on the industry's exposure to the subprime residential mortgage market. Fitch compiled U.S. life insurance industry exposure data through surveys and various public and non-public disclosures provided by 48 life insurance groups that collectively account for 82% of total industry general account invested assets. This information was supplemented by further discussions with management.

While Fitch expects further deterioration in the performance of subprime residential mortgages, particularly for the late 2005 and 2006 vintage years, our analysis suggests that the industry is well positioned to withstand current market volatility given its focus on high investment grade securities, relatively stable liability profile and positive cash flow.

The Special Report, 'Fitch Views Subprime Mortgage Exposure for U.S. Life Insurers as Manageable,' is now available under the Financial Institutions / Insurance tab on www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Contacts

Fitch Ratings
Douglas L. Meyer, CFA 312-368-2061
R. Andrew Davidson, CFA 312-368-3144
Julie A. Burke, CFA, CPA 312-368-3158 (Chicago)
Media Relations:
Kenneth Reed, 212-908-0540 (New York)

Sharing

Contacts

Fitch Ratings
Douglas L. Meyer, CFA 312-368-2061
R. Andrew Davidson, CFA 312-368-3144
Julie A. Burke, CFA, CPA 312-368-3158 (Chicago)
Media Relations:
Kenneth Reed, 212-908-0540 (New York)