Fitch Ratings has completed an initial review of the investment exposure to Fannie Mae and Freddie Mac held by U.S. life and property/casualty (P/C) insurers. Based on that review, Fitch believes that the impact on the insurance companies' ratings will be limited.

The focus of Fitch's review was on the insurer's investments in Fannie and Freddie preferred and common stock. Based on the assumption that the value of those investments is zero, Fitch estimates the insurer's loss exposure to be approximately $4 billion, which equates to approximately 0.5% of combined statutory capital for U.S. life and P/C insurers. Loss exposure is concentrated in a small number of insurers. Based on Fitch's data, which was sourced from investment surveys, regulatory disclosures, and SEC filings, the 10 companies with the largest loss exposures accounted for 72% of Fitch's total loss estimate.

Fitch notes that U.S. insurers do have a material exposure to Fannie and Freddie debt, including mortgage-backed securities. Fitch estimates that Fannie and Freddie debt held by U.S. life and P/C insurers total approximately $350 billion, which equates to approximately 11% of total investments and 44% of industry statutory capital. Fitch continues to view Fannie and Freddie debt to have the explicit support of U.S. federal government. On Sept. 7, 2008, Fitch affirmed the 'AAA' long-term Issuer Default Ratings and senior debt ratings of Fannie Mae and Freddie Mac.

Fitch's ongoing review of Fannie and Freddie exposure focuses on life insurers that have Fannie and Freddie exposure (direct and indirect) through credit derivatives swaps (CDS) used as part of a replication strategy or as a portfolio yield enhancement strategy. Fitch expects that CDS-related exposure to Fannie and Freddie to be limited due to the modest use of CDS by life insurers and our expectation low loss severity, and will report our conclusions as Fitch furthers its analysis.

Rating actions to date have been limited to one U.S. life insurer. Fitch recently downgraded Old Mutual plc's U.S. life insurance subsidiaries due in part to the companies' exposure to Fannie and Freddie preferred and common stock. Fitch expects the company expects to realize a loss of $135 million, which equates to 22% of statutory capital for the U.S. life insurance subsidiaries.