Friday, February 22, 2008

Subprime Pressures Increase for U.S. Life Insurers in 2008

(Fitch) After updating Fitch Ratings' prior analysis of subprime exposure for U.S. insurers, the agency continues to believe that the U.S. life insurance industry's investment exposure to problematic subprime and Alt-A residential mortgage collateral is manageable. However, Fitch notes that there has been significant deterioration in subprime mortgage performance in the second half of 2007, which has led to a material decline in market valuations, particularly in the fourth quarter of 2007, and increased downgrade activity.

To coincide with Fitch's views on subprime's affect on U.S. life insurance credits, the agency will host a conference call Friday, Feb. 22 at 11am ET. All call details will be provided today through a separate announcement, to be issued shortly.

Fitch's Special Report, 'Subprime Mortgage Exposure for U.S. Life Insurers - Update and Outlook,' released today, summarizes Fitch's views and provides detailed information on the industry's exposure to the subprime and Alt-A residential mortgage markets and includes stress test results of life insurers' capital based primarily on 2007 and 2006 vintage subprime and Alt-A mortgage holdings at Sept. 30, 2007 and Fitch's stress loss estimates.

Fitch estimates unrealized mark-to-market losses on subprime and Alt-A related investments held by U.S. life insurers to be in the $7 billion to $8 billion range, which equates to approximately 13% of exposure and 3% of aggregate industry statutory capital. Further, Fitch expects the industry to report realized losses of between $2 billion and $3 billion (GAAP) in the fourth quarter of 2007.

While Fitch expects further deterioration in the performance of subprime residential mortgages, particularly for 2006 and 2007 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. Despite the significant deterioration of subprime mortgage markets and increased credit risk in other fixed income markets, Fitch views the U.S. life insurance industry as well capitalized.

Fitch has taken limited negative rating actions on U.S. life insurers due to subprime-related credit issues in 2007. On an individual company basis, Fitch's most recent stress test of current holdings reveals that most life insurers will not have a credit issue driven by subprime losses. Several companies are being more closely monitored due to either significant CDO exposure or more significant investment in subprime RMBS with 2006 and 2007 vintages or exposures outside the insurance group.

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