Despite a spate of reports of first-quarter investment losses byNorth American life and property-casualty insurers, Moody'sInvestors Service announced it does not foresee any significantnumber of ratings downgrades coming.

"We expect near-term rating actions due to investment losses tobe limited," said Jeffrey Berg, Moody's senior vice president.

However, Moody's generally upbeat assessment of insurers wasfollowed by its statement today that it is reviewing for possibledowngrade the insurance financial strength ratings of severalinsurance subsidiaries of American International Group.

Last week, the parent firm announced a first-quarter net loss of$7.8 billion and Moody's placed it on review for possible downgradeof its long-term ratings. The review process for the parent companycould lead to a rating downgrade of one or two notches, saidMoody's.

For the firm's operating company ratings, the subject of today'sannouncement by Moody's, any potential downgrade should be limitedto one notch, the rating agency said.

Mr. Berg, in a statement concerning the insurance marketplace asa whole, explained that most carriers have "well-diversified andhigh-quality investment portfolios and very strong financialprofiles" in terms of "profitability, capital adequacy andfinancial flexibility."

Mr. Berg was author of a Moody's report titled "InvestmentLosses Jump for Many North American Insurers in 1Q08."

Insurers, Moody's noted in the report, have reported meaningfulfirst-quarter increases in both realized and unrealized losses dueto significant widening of credit spreads across most assetclasses.

According to Mr. Berg, most insurance companies have a verystrong liquidity and stable liability profile, as well as theability and intent to hold asset securities with depressed marketvaluations until prices recover or investments mature.

However, Moody's said, rating actions are possible for insurerswith outsized losses relative to their earnings and/or capital(e.g. in excess of 10 percent of equity), especially companiesweakly positioned within their rating level.

For the rating agency, Mr. Berg said a particular concern is thefact that "large declines in reported shareholders' equity due tounrealized investment losses could strain an insurer's financialflexibility because of covenants in their bank credit facilitiestied to minimum equity levels or maximum financial leveragelevels."

He noted that such covenants are most common withnon-investment-grade companies.

Moody's said as the substantially wider credit spreads extendedbeyond structured asset classes to corporate, municipal and agencybonds in the first quarter, combined with insurers' heavyconcentration in medium-duration fixed income securities and theirbalance sheet leverage, there has been meaningful movement inunrealized losses relative to equity.

Mr. Berg added that "over time, we expect a portion of thedepressed prices for certain asset classes to reverse as marketsstabilize; in fact, during the month of April, credit spreads havetightened and some of the unrealized losses reported at quarter-endhave reversed."

He noted that not all insurers hold the same investment mix orportfolio duration, and said "the impact of the credit spreadwidening was more pronounced relative to p-c insurers."

Moody's said most of the impact from the decline in the marketvalue of bonds was reported as unrealized losses (throughshareholders' equity), although an increase in realized losses andother than temporary impairment charges (taken through the incomestatement) for many insurers also occurred, given the continueddepressed prices for certain asset classes.

The report predicted that the current recessionary economicenvironment will negatively impact not only the investmentportfolios of insurers due to higher levels of corporate defaultsand credit losses, but also the businesses of both life and p-cinsurers.

Insurance pricing and terms and conditions "continue to weakenin the p-c market, and the lower and more volatile equity marketsare putting pressure on fee-based life insurance business lines andon the hedging programs for variable annuity products," accordingto the report.

An economic recession is likely to increase claim costs andcurtail sales of insurance products, Moody's said, and Mr. Bergcommented that "if these negative trends in core businessconditions accelerate combined with higher credit losses driven byboth the distressed structured asset classes and the highercorporate default rates expected in a recessionary period, weexpect profitability and capital adequacy to be weakened over themedium term and ratings for some insurers could be pressured."

Concerning AIG, Moody's said its financial strength reviewcovers the "Aa2" rating of AIG's Commercial Insurance Group, AIGEdison Life Insurance Company; American International AssuranceCompany (Bermuda) Limited and American Life Insurance Company.

The parent company's loss, Moody's said, included significantunrealized market valuation losses on super-senior credit defaultswaps with subprime mortgage content, as well as realized capitallosses and unrealized depreciation on investments, mostly subprimeand Alt-A residential mortgage-backed securities.

However, Moody's said that AIG's ultimate economic losses onresidential mortgage-backed securities and super-senior creditdefault swaps may be materially smaller than the estimated marketvalues would suggest. Capital-raising efforts by the company shouldstrengthen its balance sheet, but will also increase the firm'sfixed-charge burden, Moody's said.