Insurer's Mortgage Meltdown Exposure Minimal

Insurer's investment portfolios will suffer minimal repercussions from the sub-prime mortgage meltdown, but resulting legal actions will probably cause professional liability claims, rating agency executives said.

In a conference call held today, executives with Moody's Rating Service said only one to two percent of insurer's investment portfolios are invested in subprime mortgage securities, amounting to little impact on their business and subsequently not affecting their ratings.

Ted Collins, group managing director, said the impact applied globally to the insurance industry; however mortgage insurers and financial guarantors could be most impacted.

David Fanger, team managing director, said that actions taken by the government and financial communities have had a positive impact on the situation and "the process of normalization has begun."

Robert Riegel, managing director of insurance in the Americas said the U.S. property-casualty market has less than 1 percent investment in the market, while the life industry is closer to 2 percent. They have the financial wherewithal to sustain any losses and Moody's does not see ratings being affected, he added.

However, some individual insurers could be affected, Mr. Riegel said, as claim costs increase for insurers directors and officers liability and errors and omissions lines because of defense cost over civil litigation anticipated against mortgage lenders and others connected to the subprime market. The impact, he continued, "should be modest and manageable" to these insurers who he said are large insurers with significant capital.

Jack Dorer, managing director for financial guarantors and mortgage insurers, said mortgage insurers have some exposure. That exposure is minimal, he said, because the majority of their risks, about three quarters, are in prime mortgage accounts. He also noted that they do employ strict underwriting standards, including credit scorings. They also have written fraud exclusions into their policies which should add additional protections.

He said subprime risks represent less than 12 percent of total mortgage insurers' exposure.

Despite a jump in losses and drop in net income most are well capitalized and will see modest returns continue, he commented, but Moody's still remains cautious about the companies.

One company suffering from the downturn is Radian Guaranty Inc. that found its rating placed on review for possible downgrade yesterday because of its exposure to subprime accounts. Moody's took the action after Radian announced its deal to merge with MGIC Investment Corp. was terminated.

Mr. Dorer explained that if the deal had gone ahead Radian's exposure would have been more manageable, but now the company bears watching.

Radian currently has a Moody's insurance financial strength rating of "Aa3."

Fitch Ratings went ahead and downgraded Radian yesterday one notch from "single-A-minus" to "single A." Fitch said today that Radian requested that the rating service withdraw all of its ratings on the carrier and its subsidiaries.

Fitch said it would maintain the rating and monitor investor's interest that it feels is great at the moment. If investor's feedback shows less interest the rating service will visit withdrawing the rating. Also, Fitch said that if it can not obtain adequate information from the company in the future it will withdraw the rating.