A sign for the financial ratings agency Fitch ratings Ltd., located within 30 North Colonnade, is seen on a building at the Canary Wharf business and shopping district in London, U.K., on Thursday, March 1, 2012. Moody’s Investors Service said Feb. 14 that Britain may lose its Aaa credit rating. Photographer: Matt Lloyd/Bloomberg (Photo: Jason Alden/BB)

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.

(Related: Beware These Early Warning Signs of an Upcoming Recession)

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.

That means that, based on the RBC calculation rules, state insurance regulators believe the companies have about 4.7 times more capital than the minimum amount of capital needed to avoid rgulatory action.

The recommended RBC ratio for Fitch AAA-rated life insurers is just 431%, the Fitch analysts write.

Most of the life insurers’ RBC ratios and other capital level statistics are strong relative to the insurers’ Fitch ratings, the analysts write.

“This capital headroom means that the sector could absorb the capital impact of a moderate economic and financial downturn without widespread rating downgrades,” analysts write.

Even if the downturn was as severe as the 2009 downturn, life insurers’ ratings would probably drop by an average of just one rating category.

A company with a rating of BBB, for example, might drop into the BB category.

Insurers might want to raise capital to defend their ratings, but most would still have capital levels far above the state insurance regulators’ “company action level” minimums.

— Read Fitch: Stable Outlook for U.S. Life Insurers in 2016, on ThinkAdvisor.

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