OREANDA-NEWS. Fitch Ratings believes that the U.S. life insurance industry is more exposed to corporate credit risk than it was prior to the 2008-2009 financial crisis, according to a special report released today on the downward shift in credit quality of the U.S. life insurance industry's investment grade corporate bond portfolio.

'In the next credit crisis, the U.S. life insurance industry is more susceptible to rating migration due to the increased exposure to corporate bonds,' said Julie Burke, Managing Director, Insurance, Fitch Ratings.

The increased corporate exposure has lower credit quality and lower liquidity characteristics on an absolute basis and relative to regulatory capital than before the financial crisis.

Since the financial crisis, U.S. life companies have shifted their bond holdings toward corporate securities and away from structured securities. This was partially driven by a dearth of new issuance in the structured space. Within the investment-grade space for corporate securities, U.S. life insurers have moved down the rating scale. The broad NAIC 1 category ('AAA' to 'A-') allocation fell to 53% of corporate bonds at year-end 2014 from 64% at year-end 2007, while the NAIC 2 category ('BBB' category) allocation increased to 39% from 29% over that period. This translated to statutory capital exposure to 'BBB' securities increasing to 170% from 120%.

Bonds that migrate to lower NAIC categories require higher capital charges. Therefore, significant migration could cause material declines in RBC ratios for U.S. life insurers. Further, if securities are sold at a loss, or losses are deemed other than temporary, the insurer must recognize the loss as a direct charge to capital.

The full report 'U.S. Life: Growing Exposure to Corporate Bond Migration' dated Nov. 10, 2015, is available at 'www.fitchratings.com' under 'Insurance' and 'Special Reports'.