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Life insurance units at Allstate ( ALL) and Manulife Financial ( MFC) held more risky mortgage assets than capital and reserves at the end of 2008, making them more vulnerable to loan defaults.

The credit quality of commercial mortgage-backed securities will likely decline this year as defaults rise and the real estate market deteriorates, a new report from Fitch Ratings says. The investment portfolios of the nation's largest life insurance companies might suffer as a result.

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The life insurance industry has $214 billion in commercial mortgage-backed securities, according to new data from SNL Financial, which tracks the portfolios of more than 800 life insurers. More than a third of that amount, or $86 billion, is invested in bonds rated A or less. The issuers of lower-rated bonds are more likely to default, Fitch says.

Fifteen of the top 20 life insurers had more commercial mortgage-backed securities than capital and reserves. Four of those companies held more of the riskier bonds, the ones rated A or less. They were Allstate Life Insurance; Manulife's John Hancock Life Insurance; Genworth Life Insurance, part of Genworth Financial ( GNW); and Hartford Life Insurance, a unit of Hartford Financial Services ( HIG).

Prudential Insurance Company of America, the largest insurance unit of Prudential Financial ( PRU), is the largest holder of commercial mortgage-backed securities with $11.7 billion but almost all of that amount is invested in AA-rated or AAA-rated bonds.

The table below shows the life insurers with the largest holdings of commercial mortgage-backed securities. It compares those holdings to capital and reserves reflecting the amount of capital potentially at risk from increased impairments, or lost value from bond defaults.

Life Insurers With the Largest Holdings of CMBS at 12/31/08
chart
SOURCE

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This article has been corrected. Previously, it stated that a unit of Allianz held three times the amount of troubled mortgage-backed securities than it had in capital and reserves. The statement was based on information Allianz had provided to SNL Financial. Allianz has since corrected the data.
Melissa Gannon is director of insurance and bank ratings for TheStreet.com Ratings, formerly Weiss Ratings, where she directs the operations of the company's insurance and bank ratings division.

In keeping with TSC�s Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

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