Property-casualty insurers' investment portfolios are generally conservative, and most companies have little subprime mortgage exposure, according to a Bank of America investment analysis on the industry.

The bank study found also that while commercial mortgage backed securities (CMBS) portfolios were large for some companies, they were generally "of very high quality and focused on pre-2005 vintage years."

"Overall, we believe that the investment leverage and risky assets are minimal for most p-c companies," the analysis said. It added that multiline insurers tend to have a higher exposure to risky investments.

The analysis said subprime represented less than 1 percent of shareholders equity for most p-c companies. "Of the 27 p-c companies we analyzed," it said, "only five had significant subprime and Alt-A exposure."

Alt-A mortgages are considered to be riskier than prime but less risky than subprime mortgages.

Subprime/Alt-A exposure was concentrated among the largest insurers with life operations such as Allstate, AIG, The Hartford, CNA Financial and XL Capital."

Those five companies, according to the analysis, represented 98 percent of the total subprime/Alt-A exposure for the 27 companies analyzed. "On the opposite end of the spectrum, 15 p-c companies had essentially less than 1 percent of common equity in subprime/Alt-A exposure, with six p-c companies with no exposure at all," the analysis found.

Bank of America said that, for its analysis, it decided to look at p-c company CMBS exposure, which it said could be the "next concern."

"While subprime has been discussed and disclosed in more details by many companies, the next concern may be commercial real estate (CRE), more specifically, commercial mortgage backed securities. This is especially true given the significant decline in the trading value of this asset class that may lead to investment write-downs in the first quarter."

The analysis looked at CMBS exposure of 12 p-c companies. It concluded, "CMBS exposure was of high quality, with little exposure to vulnerable classes," which are defined as securities "A"-rated or below with 2006 and 2007 vintages.

Hartford had the most exposure to CMBS, equaling 89 percent of its common equity, the analysis said. It noted that The Hartford, Progressive and W.R. Berkley had the highest proportion of CMBS below investment grade.

However, for all the companies analyzed, the most vulnerable class of CMBS--"A"-rated or below with 2006 and 2007 vintages--represented an average of just 5 percent of CMBS portfolios. The 2006 and 2007 vintages alone represented an average of 37 percent of the CMBS portfolios, "with a low of 4 percent for Travelers and a high of 82 percent for W.R. Berkley," according to the analysis.

The bank said CMBS portfolios represented approximately 20 percent of fourth-quarter 2007 common equity for the p-c companies examined.

On average, 90 percent of the CMBS securities were rated "A" or above, and 71 percent were rated "triple-A." Safeco, Travelers and CNA Financial had the highest percentage of "triple-A"-rated CMBS and no below investment grade exposure, said the analysis.

In general, the analysis said the "average p-c industry investment portfolio consists mainly of very high quality fixed income securities," and added that they are well diversified.

The analysis said that p-c stocks are "a relatively safe haven within the financial sector." It noted that while prices are falling across p-c lines due to the soft market, "we expect ROEs to remain relatively solid and above their historical averages through 2009, supported by reserve releases and share buybacks."

Higher than expected price decreases, deterioration in terms and conditions, spikes in loss cost inflation, or severe catastrophe losses could jeopardize this outlook, the analysis noted.

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Bank of America Analysis Points To Strong P-C Investments

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