Fitch Takes Rating Action on U.S. CDOs Backed by Insurance T

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken rating action on nine U.S. collateralized debt obligations (CDOs) backed primarily by trust preferred securities ('TruPS') and surplus notes issued by insurance companies. With this rating action, Fitch removes three insurance TruPS CDOs from Rating Watch Negative. These transactions were placed on Rating Watch Negative on May 21, 2008 due to observed default and deferral activity. The Rating Watch Negative status was maintained in a subsequent rating action on Aug. 14, 2008.

Overall, four tranches representing $228.6 million were affirmed at their current rating levels, of which all were 'AAA'. Fitch downgraded 54 tranches of insurance TruPS CDOs representing $2.33 billion. There were no upgrades to the ratings of any Fitch-rated insurance TruPS CDO. In all, 24 tranches, or $1.55 billion, retained investment grade ratings and 34 tranches, or $1.01 billion, were moved to below investment grade ratings.

A complete list of rating actions is provided in the special report 'Fitch Takes Rating Action on CDOs Backed by Insurance TruPS' available at www.fitchratings.com.

The rating actions reflect the review methodology described in the press release 'Fitch Revises Criteria For Reviewing U.S. CDOs Backed by Bank & Insurance TruPS' dated March 25, 2009. More specifically, the rating actions incorporate the impact of the first-time application of Fitch's Portfolio Credit Model ('PCM') to evaluate the pool of non-bank corporate assets supporting the CDO notes. PCM is Fitch's main analytical tool used to determine default, recovery and loss rates for portfolios of corporate debt. The PCM correlation framework captures the risk of industry and sector concentrations, a prevalent characteristic of insurance TruPS CDOs, as well as regional and country concentrations. The application of PCM resulted in increased rating loss rates for the highly concentrated insurance TruPS portfolios. The elevated rating loss rates translated into insufficient credit enhancement to support existing ratings, hence the downgrades.

Today's actions also reflect the downward pressure on the performance of U.S. property/casualty insurers, which comprise about three-quarters of the issuers included in insurance TruPS CDOs. Fitch's Rating Outlook for the U.S. property/casualty sector is Negative. The primary drivers to this Negative Outlook are the ongoing impact of market volatility on investment performance and anticipated further pressure on underwriting performance due to competitive pricing. The Negative Outlook also considers reductions in capital reported by property/casualty insurers in 2008 tied largely to investment losses, and a reduced ability to replenish capital in the current economic environment.

Fitch's Rating Outlook on U.S. life insurers is also Negative. Life insurers, which comprise approximately 17% of the aggregate insurance TruPS CDO portfolio, have been much more affected by the current financial crisis, due to greater asset leverage, higher investment concentrations in mortgage backed and structured securities, and equity related risk tied to equity market guarantees on variable annuity products. These exposures have led to materially greater reserve requirements and reductions in capital.

Fitch notes that insurance companies have not defaulted or deferred on their TruPS obligations to the same degree as U.S. banks and thrifts. In fact, there has been only one recent deferral of a Bermuda-based life reinsurer that elected to defer beginning in March 2009. This particular issuer funded through all nine Fitch-rated insurance TruPS CDOs with total exposure of $129.5 million. As a result, the performance of CDOs backed by insurance TruPS has been different than that of CDOs backed by bank TruPS.

As part of these rating actions, Fitch has also assigned Rating Outlooks to the bonds rated 'B' and better to reflect the likely direction of any rating change over a one- to two-year period. Future rating actions will be largely driven by performance in terms of deferrals and defaults of the insurance companies and other financial institutions underlying these transactions.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.