Big U.S. life insurers have deep piles of capital, and they appear to be in a good position to survive a repeat of the 2007-2009 Great Recession.
A team of Fitch Ratings analysts led by Mark Rouck give that assessment in a recent review of the insurers’ finances.
The analysts looked into concerns that the average credit quality of the bonds in life insurers’ has dropped since 2007, and that life insurers have increased the percentage of their assets invested in collateralized loan obligations, or CLOs.
The share of the life insurers’ own bond portfolios invested in bonds rated A or above fell to 61% as of Sept. 30, 2018, from 69% at the end of 2007, and life insurers probably have about 10% of their capital invested in CLOs, analysts said.
Most of the CLOs appear to hold high-quality loans, but “some insurers’ CLO exposure relative to total adjusted capital is far above that of the overall industry,” the analysts write.
“We believe CLO exposure could represent a significant risk if investor protections weaken late in the credit cycle,” the analysts write.
But the analysts said they looked to see what could happen to the life insurers, overall, if bonds performed as poorly sometime in the near future as bonds performed in 2009, the worst year of the Great Recession.
Right now, even though few U.S. life insurers have AAA insurer financial strength ratings, U.S. life insurers as a whole ended 2017 with a risk-based capital (RBC) ratio of 466%, the analysts write.