Fitch Ratings believes that the possible inclusion of life insurers in the U.S. Treasury Department's Troubled Asset Relief Program (TARP) could be a positive development for those eligible life insurers and therefore could temper future downgrades if more capital pressure develops than anticipated in current ratings. Fitch believes that government funding would provide a source of financial flexibility not currently available in the capital markets for life insurers.

A likely inclusion of life insurers in TARP has been reported by various media outlets in the past two days, though to Fitch's knowledge no life insurer has yet been formally approved to receive TARP funds. Fitch's commentary today is intended to provide the market an understanding of how the provision of TARP funds could impact life insurer ratings, should funding be extended.

While generally positive for ratings, the receipt of TARP funds would not necessarily prevent future rating downgrades, especially moderate one to two notch downgrades, as ratings encompass factors beyond capital, such as earnings levels and volatility, risk management, and strength of franchise. In addition, the form and terms of support will also be an important consideration from a ratings perspective, and this remains a material unknown. Fitch will make judgments as to the impact of government support on a case-by-case basis. Fitch expects the impact of government support to be an evolving aspect of its methodology.


As has been seen in the banking industry, government support through the infusion of capital can help stabilize ratings. For life insurers, Fitch expects this could lead to some stabilization of insurer financial strength (IFS) or policyholder ratings for those entities receiving support. However, similar to our treatment of banking companies that receive government support, Fitch anticipates there will be a greater possibility of wider notching between the regulated insurance companies and their holding company debt obligations, particularly as they pertain to deferrable hybrid capital instruments. Fitch believes those companies receiving government support will be at an increased risk of electing their right to defer interest or coupon payments on deferrable hybrids in order to preserve capital for the operating companies.

To date, only a handful of insurance organizations known to Fitch globally have received capital injections from the government, with the only U.S. based company being American International Group Inc. (AIG). In AIG's case, support was needed mainly due to problems related to credit default swap business in non-insurance subsidiaries as well as securities lending activities in its insurance operations.

In September 2008, Fitch revised its Outlook for the U.S. life insurance sector to Negative from Stable, reflecting the significant deterioration in the credit and equity markets, and the expected impact of realized and unrealized investment losses on life insurers' capital levels and profitability. The Negative Outlook also reflects ongoing concern regarding the industry's expanding equity market exposure driven by growth in variable annuities, market performance guarantees which can add significant volatility to financial performance and capital in a period of unstable market conditions. Finally, Fitch is concerned that liquidity pressures could develop for some life insurers if capital markets remain unstable and funding needs cannot be met.

Since the outlook change Fitch has downgraded 25 of the 69 U.S. life and health insurance groups (including multi-lines and subsidiaries of foreign parents) representing 36% of the rated universe and 70% of the groups publicly commented on to date. Reviews are ongoing. Most downgrades have been limited to one or two notches.