S&P Finds No Subprime Impact On Insurers

S&P's findings were contained in an article titled "Survey Reveals That Rated Insurers' Investments Globally Are In Prime Shape."

The firm's main conclusion in the study is that S&P expects the sectors it examined "will navigate the recent deterioration in subprime mortgage-related assets with sufficient liquidity to meet their financial obligations."

Across all regions, the level of industry capital should be sufficient to absorb the volatility over the next year. Consequently, S&P said it is maintaining its stable outlooks on the U.S. personal and commercial property-casualty, U.S. life, global reinsurance and managed care sectors.

The rating firm said, however, that given the recent market volatility, it continues to be alert "that more traditional bond and stock portfolios don't also deteriorate and that underwriting results remain strong."

The survey, which assessed subprime exposure as of June 30, listed several key points:

o The vast majority of rated insurance entities have negligible subprime exposure.

o A small number of companies had subprime exposures that aren't negligible. But, S&P considers these exposures manageable because these companies targeted asset classes rated "AA" and higher. (Of the $91 billion in estimated total exposure, 93 percent is in "AA" or "AAA" tranches), the firm said.

o Global players usually acquired subprime exposure through their U.S. subsidiaries.

o The life sector generally had a greater percentage of subprime exposure. S&P called this unsurprising given life insurers' longer-tailed product liabilities, need for longer-dated asset instruments and pursuit of higher yields.

According to Fitch, increased default rates in subprime mortgage portfolios have resulted in significantly higher cumulative loss expectations, and consequently, rating downgrades in primarily the subordinated classes.

The firm said it expects further deterioration in subprime mortgages, specifically in the 2005 and 2006 vintage years resulting from a number of adjustable rate mortgage loans moving into the reset phase.

It found that the combination of "teaser" interest rates on adjustable rate mortgages and institutional money flowing into the mortgage market seeking higher returns resulted in intense competition in the subprime mortgage origination market.

The reason vintage years 2005 and 2006 are looked at with more scrutiny is because increased competition in the subprime mortgage arena led to relaxed underwriting standards, Fitch said.

According to statutory filings for the property-casualty insurance industry, Fitch reported that as of year-end 2006, the fixed income investment portfolio is extremely high quality with 98 percent being investment grade.

Looked at another way, below investment grade bonds amounted to less than 4 percent of industry surplus. Exposure to all mortgage-backed securities was called "very manageable when it is considered that it accounted for less than 14 percent of all fixed income investments or approximately one-quarter of industry surplus."

Fitch noted that statutory data does not differentiate subprime investments from mortgage-backed securities, but based on Fitch's analysis and discussions with insurers, it is believed to be a very modest percentage of the whole.

Fitch found that publicly traded property-casualty insurers reported subprime exposure of approximately $44 billion, representing 3 percent of total investments and roughly one-quarter of policyholders' surplus.

Fitch said these results were significantly skewed by American International Group's holdings, which accounted for approximately two-thirds of the total.

Assessing subprime exposure in "alternative investments," Fitch said, can be especially challenging because some hedge funds sold subprime exposure short, and actually benefited from the industry's troubles. Such holdings of alternative investments, it said, appear to be minimal among property and casualty insurers.

Since subprime mortgage exposure is not a significant direct risk for the property-casualty insurance industry, Fitch said its primary concern is deterioration in other sectors of the credit market as a result of subprime mortgage problems.

Favorably, most property-casualty insurers have minimal immediate liquidity needs, and are thus well positioned to weather a "capital markets storm," Fitch said and advised it will continue to monitor developments in the subprime mortgage market and its impact on the U.S. property-casualty insurance industry.

The rating firm noted that litigation surrounding the subprime mortgage market will result in directors and officers liability and errors and omissions insurance claims.