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A recent report from Moodys Investors Service could not identify any U.S. life insurer whose credit losses tied to WorldCom Inc. would be sufficient to cause credit concerns.

Nevertheless, the rating agency did suggest that an examination of U.S. life insurers exposure to WorldComs $30 billion debt, as well as similarly troubled telecoms, during this deteriorating credit cycle is appropriate.

“Moodys is increasingly concerned with the rising frequency and severity of problem credits within life insurance company investment portfolios,” says Robert Riegel, Moodys managing director for U.S. life & health insurance. “The rapidly expanding number of troubled firms, frequently exacerbated by accounting and/or corporate governance

issues, has, in aggregate, taken a substantial toll on the investments of the U.S. life insurance industry.”

Exposure to WorldCom Inc., the troubled firm du jour, appears to be manageable for the US life insurance industry.

In his June report, Moodys Senior Credit Officer Arthur Fliegelman, states that the “life insurance industrys $5.3 billion exposure to WorldCom also has to be related to WorldComs approximately $30 billion of outstanding debt.” He continues, “While these two numbers are not directly comparable for numerous reasons, it is clear that the life insurance industrys exposure to WorldCom is not unexpected given the large role the insurance industry normally plays in the overall fixed income market.”

Moodys analysis places special emphasis on telecom bonds held in insurers portfolios because “in many cases, recovery rates on defaulted telecom bonds are likely to be modest, at best, and worse than historical recovery rates on senior unsecured bonds.”

In WorldComs case, as of December 31, 2001, the U.S. life insurance groups leading the list of identified WorldCom exposures by total dollar amounts are: American International Group ($415 million), Prudential Financial ($321 million), AEGON USA ($317 million), Northwestern Mutual ($285 million) and MetLife ($277 million). Combined, these five groups accounted for nearly 30% of the entire industrys WorldCom exposure.

Greater trouble could surround the six legal entities that had greater than 10% of their year-end 2001 statutory capital invested in WorldCom related securities. The Moodys report submits that the following companies surplus positions could be “significantly affected by the WorldCom situation and could require an external surplus injection”: AIG Life Insurance Company; William Penn Life Insurance Company of N.Y.; North American Company for Life & Health Insurance of N.Y.; GE Capital Life Assurance of N.Y.; Jackson National Life Insurance Company of N.Y.; and Horace Mann Life Insurance Company. The reports note, however, that “these six most exposed companies are small legal entities and part of much larger groups.”

Going forward, Fliegelman intends to continually monitor the U.S. life insurance industrys exposure to the telecom and related sectors, believing that it is more likely than not that another WorldCom scenario will appear in the near term.

Says Fliegelman, “Moodys believes it is likely to see continued credit deterioration and losses occurring in insurers investment portfolios, which will increase the risk profile of some insurers.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, July 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.