Despite a spate of reports of first-quarter investment losses by North American life and property-casualty insurers, Moody's Investors Service announced it does not foresee any significant number of ratings downgrades coming.

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

However, Moody's generally upbeat assessment of insurers was followed by its statement today that it is reviewing for possible downgrade the insurance financial strength ratings of several insurance 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 downgrade of its long-term ratings. The review process for the parent company could lead to a rating downgrade of one or two notches, said Moody's.

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

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

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

Insurers, Moody's noted in the report, have reported meaningful first-quarter increases in both realized and unrealized losses due to significant widening of credit spreads across most asset classes.

According to Mr. Berg, most insurance companies have a very strong liquidity and stable liability profile, as well as the ability and intent to hold asset securities with depressed market valuations until prices recover or investments mature.

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

For the rating agency, Mr. Berg said a particular concern is the fact that "large declines in reported shareholders' equity due to unrealized investment losses could strain an insurer's financial flexibility because of covenants in their bank credit facilities tied to minimum equity levels or maximum financial leverage levels."

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

Moody's said as the substantially wider credit spreads extended beyond structured asset classes to corporate, municipal and agency bonds in the first quarter, combined with insurers' heavy concentration in medium-duration fixed income securities and their balance sheet leverage, there has been meaningful movement in unrealized losses relative to equity.

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

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

Moody's said most of the impact from the decline in the market value of bonds was reported as unrealized losses (through shareholders' equity), although an increase in realized losses and other than temporary impairment charges (taken through the income statement) for many insurers also occurred, given the continued depressed prices for certain asset classes.

The report predicted that the current recessionary economic environment will negatively impact not only the investment portfolios of insurers due to higher levels of corporate defaults and credit losses, but also the businesses of both life and p-c insurers.

Insurance pricing and terms and conditions "continue to weaken in the p-c market, and the lower and more volatile equity markets are putting pressure on fee-based life insurance business lines and on the hedging programs for variable annuity products," according to the report.

An economic recession is likely to increase claim costs and curtail sales of insurance products, Moody's said, and Mr. Berg commented that "if these negative trends in core business conditions accelerate combined with higher credit losses driven by both the distressed structured asset classes and the higher corporate default rates expected in a recessionary period, we expect profitability and capital adequacy to be weakened over the medium term and ratings for some insurers could be pressured."

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

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

However, Moody's said that AIG's ultimate economic losses on residential mortgage-backed securities and super-senior credit default swaps may be materially smaller than the estimated market values would suggest. Capital-raising efforts by the company should strengthen its balance sheet, but will also increase the firm's fixed-charge burden, Moody's said.

Special Reports /

Moody's: Insurers Look Good, But AIG Subs Put On Review

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