Fitch: U.S. Life Insurers Face Higher Energy-Related Losses in 2016
"U.S. life insurers face \\$3 - 4 billion of energy-related corporate bond losses in 2016, which we view as manageable in relation to industry earnings and capital," said Tana Higman, Director, Insurance, Fitch Ratings.
Under Fitch's base case scenario, expected energy-related corporate bond losses are approximately 5% of the industry's statutory earnings and 1% of statutory capital, and includes impairments based on a 11% high yield default rate assumption and portfolio repositioning trading losses.
Energy corporate bond exposure for U.S. life insurers is in line with the broader corporate bond market at approximately 11% - 12%. This equates to approximately 5% of total cash and invested assets for U.S. life insurers.
The credit quality of life insurers' energy-related corporate bond holdings is better than the broader market given their historical focus on investment-grade bonds. Fitch estimates that approximately 15% of the industry's energy-related corporate bonds are rated non-investment grade compared to approximately 30% for the broader market.
"While U.S. life insurers are relatively well-positioned to ride out the oil slump, in a 'lower for longer' oil price scenario insurers may be more susceptible to ratings downgrades if energy contagion spills into other asset classes," said Doug Meyer, Managing Director, Insurance, Fitch Ratings.
Fitch estimates that U.S. life insurers' energy high-yield exposure in 2015 increased to 15% which could trigger higher regulatory capital requirements for many insurers.
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