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U.S. Life Insurers Can Endure CMBS Delinquencies, Fitch Reports

Although delinquency rates for property types underwritten by commercial mortgage-backed securities rose to 3.96% at the end of October, the life insurance sector should be able to manage its near-term exposure to losses related to commercial real estate, Fitch Ratings reports.

While life insurers may be able to withstand such losses related to commercial real estate in the short-to-intermediate term, in some cases their ratings may be downgraded when because of pressure from other asset classes and products.

Conservatively, Fitch projects that life insurers will take a hit of $15.7 to $19.1 billion on their commercial real estate investments, compared with industry capital of $228 billion as of June 30. Net earnings were $22.4 billion during the first half of 2009.

“Loss exposure for U.S. life insurers will be mitigated compared to other market participants due to their investment in higher credit quality assets, strong capital position and earnings,” said Senior Director Andrew Davidson of Fitch’s insurance ratings group in a statement.

“Fitch’s Negative Outlook for life insurers continues to be driven largely by concerns over investment losses due to deterioration in the financial markets and the economic downturn,” he added.

According to Fitch, the life insurance industry is generally better positioned than other investment sectors to ride out current market disruptions. The sector’s health stems from its stable liability profile and positive cash flow.

However, the rating agency notes that significant declines in capital over the past 18 months have weakened insurers’ ability to manage through a prolonged economic downturn.

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