Fitch Ratings today said that subprime pressures will increase further for U.S. life insurers in 2008.
Fitch, Chicago, says it still believes that the U.S. life insurance industry’s investment exposure to problematic subprime and Alt-A residential mortgage collateral is manageable. The agency adds, however, that significant deterioration in subprime mortgage performance in the second half of 2007 led to a substantial decline in market valuations, particularly in the fourth quarter, and increased downgrade activity.
Fitch reckons unrealized losses on subprime and Alt-A related investments held by U.S. life insurers to be in the $7 billion to $8 billion range. That would equal about 13% of exposure and 3% of aggregate industry statutory capital, the agency says. It also expects the industry to report realized losses of between $2 billion and $3 billion under generally accepted accounting principles in fourth quarter 2007.
The agency expects further decline in the performance of subprime residential mortgages, particularly for 2006 and 2007. Still, it believes the industry is well positioned to survive current market instability because of 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, the U.S. life insurance industry is well capitalized, Fitch says.