Moody's Investor Service, in its 1998 US Life Insurance Industry Outlook, said the financial strength and debt ratings of US life insurers are likely to remain under pressure in the medium-term.

And the industry, which posted earnings growth of 20 per cent in 1997, may see profits start to erode if market and economic conditions deteriorate, Moody's said in the report.

Moody's said its negative outlook also is tied to the industry's excess capacity, eroding financial services barriers and market conduct litigation. Consolidation should continue to drive overall rating activity and lower-rated companies are likely to remain the primary beneficiaries.

An economic slowdown may prompt greater levels of credit losses in the investment portfolios of life insurers, the rating agency said.

The industryalso would be challenged with spread deficiency risks on minimum guarantees on various insurance products if interest rates remained at current levels for an extended period of time.

Meanwhile, the equity market downturn may take a toll on the variable annuity business, which has been the industry's strongest growth vehicle.

The downturn may depress new sales volumes, lowering fee income and prompting greater surrender activity, Moody's said.

Although the industry's overall asset quality is strong, Moody's said some insurers may have increased credit risks.

Fixed income securities remain the mainstay of the life insurance industry at about 70 per cent of invested assets, Moody's said.

But, the mix has shifted away from interest-based risk towards greater credit risk.

As a result, below-investment grade bonds and privately-placed corporate securities rose in 1997, while mortgage-backed securities and collateralized mortgage obligations declined.

Moody's said these trends are likely tocontinue.

"However, we believe industry memories are long, and a return to 1990 -- when below-investment-grade securities amounted to 11 per cent of bonds and over 80 per cent of the industry's capital -- is unlikely in the medium term," according to the report.

But with the growth of investment opportunities, many portfolio managers have expanded beyond the traditional classes of bonds, Moody's said.

Some have added foreign securities to their portfolios.

Most of these investments have been largely dollar-denominated government and high-grade corporates in Canada and other developed countries.

But exposure to Southeast Asian, Latin American and Russian assets are significant for a handful of companies, Moody's said.