Sovereign Debt Unlikely to Tank Life Insurers: Fitch

“Historically, insurers have held the majority of their non-U.S. government debt in higher rated NAIC-designated class 1 securities, or those bonds rated ‘A-’ and above,” Fitch said in a release. “Insurers increased their holdings of class 1 non-U.S. government debt to $28 billion or 75.4% of the total non-U.S. government debt held by Fitch”s universe of life insurers. This represents a 65% increase in NAIC class 1 securities held from year-end 2007, when NAIC class 1 non-U.S. government debt totaled $17 billion.”

Fitch expects a weak global recovery for the rest of 2010 and through 2011 and does not expect to see a substantial change in the credit quality of the life insurance industry’s sovereign debt investments.

The International Monetary Fund echoes Fitch’s broader outlook. On September 1, it released a report entitled “Default in Today’s Advanced Economies: Unnecessary, Undesirable, and Unlikely,” in which it plays down the magnitude of sovereign debt risk, especially concerns over defaulting.

Most of the government defaults in recent decades were a result of economies unable to handle high interest payments, and defaulting actually bettered their larger economic outlook, the IMF notes. The debt crises facing the Eurozone in particular are of a different kind, where government primary spending exceeds income (especially on health care and thanks to changing demographics). In such cases, defaulting is simply not a workable option, and one unlikely for any advanced economy to seriously consider, the IMF says. Fiscal adjustment supported by growth-enhancing reforms are more effective and are already being seen in countries such as the United Kingdom, where government budgets have been slashed, and Greece, where difficult austerity measures are being worked through, it observes.