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Moody's: US life insurers' RBC ratios could fall 15% in severe stress scenario

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Moody's: US life insurers' RBC ratios could fall 15% in severe stress scenario

U.S. life insurers could see their risk-based capital substantially deteriorate under severe credit migration stress, according to a recently released Moody's report.

Searching for yield in a low-rate environment is causing U.S. life insurers to be more susceptible to the negative impacts of falling rates, Moody's said. Although the rating agency said it considers risk-based capital ratios currently strong, median ratios could still decrease 15% in a severe stress scenario.

Manoj Jethani, a Moody's vice president, noted that asset risk is a "significant risk" considered in the calculation of the risk-based capital ratio.

"A sharp downward turn in the credit cycle that leads to a large number of credit rating downgrades within insurers' bond portfolios, and a corresponding rise in defaults, would reduce life insurers' capital strength," Jethani said.

Insurers with a large proportion of securities rated at the lower end of A-rating and Baa-rating are particularly vulnerable to risk-based capital ratio declines. Rating migration for those insurers can lead to increased regulatory capital requirements, relative to insurers with less exposure.

The report also noted that the rating migration scenario is a supplement to Moody's stress testing.

An analysis done by S&P Global Market Intelligence shows that life insurers have been growing investments in BBB-rated bonds, which could cause some challenges in an economic downturn. Falling interest rates are also set to drag on life insurers' investment results, according to S&P Global Market Intelligence analysis.