P-C Sector Subprime Exposure Analyzed

A rating firm said U.S. property-casualty insurers face little impact on their portfolios from the subprime mortgage market collapse, but European carriers could face legal claims, according to an insurance brokerage.

Moody's Investors Service said today it estimates that total U.S. p-c industry exposure to subprime-related investments is less than $15 billion.

The assessment of European insurers came yesterday from Marsh Inc.

Paul Bauer, a Moody's vice president, said in a statement, “Based on our surveys of companies and a review of statutory financial statements, we believe that only a handful of property and casualty insurers have noteworthy levels of investments in instruments exposed to subprime mortgage risk.”

Mr. Bauer authored a report titled “Most U.S. Property and Casualty Insurers Have Little Subprime Mortgage Exposure,” which provides an assessment of exposure based on statutory financial information filed with insurance regulators and a survey of p-c insurers.

Reporting on the review of statutory financial information, Mr. Bauer said that for the p-c industry overall, investments in all forms of non-government, non-agency mortgage-backed securities, asset-backed securities and collateralized debt obligations amount to 16 percent of total industry policyholder surplus.

He added that the residential mortgage-backed securities portion is 6 percent and that the equivalent of 1 percent of surplus was rated “single-A” or lower as of year-end 2006.

Although statutory financial information doesn't distinguish subprime investments from others, “we believe subprime exposure is a modest percentage of these amounts,” Mr. Bauer said, noting that results based on a survey of p-c insurers were consistent with this view.

For individual p-c insurance companies, the total amounts of exposure varied from none at all in most cases, up to about 15 percent of total shareholders' equity, he said.

In London, representatives of the financial institutions practice of Marsh turned their attention to the subject of potential claims for directors and officers liability insurers and errors and omissions (professional liability) insurers.

Siobhan O'Brien, a senior vice president in Marsh U.K's financial institutions practice, noted that some European banks have frozen certain funds and the European Commission has also announced it will review the code of practice of credit ratings agencies in light of reports that they were slow to advise clients on the crisis.

“European insurance companies, hedge funds, banks and ratings agencies must continually assess the risks raised by the subprime crisis and examine their D&O [directors and officers liability] and E&O [errors and omissions] exposures,” she said.

Ms. O'Brien noted that potential claims are likely to arise from allegations of poor underwriting practices by lenders or accusations that funds mismanaged investment portfolios.

Ms. O'Brien also predicted that premiums for European D&O and E&O insurance will rise as a result, even though the European D&O market had been largely stable in recent years.