The regulatory unit that examines the financial strength of insurers' investments says in a new analysis that the industry will not be impacted by the collapse of the subprime mortgage market.
That finding by the Securities Valuation Office, a securities-rating arm of the National Association of Insurance Commissioners, Kansas City, Mo., was published in the November 2007 SVO Research Quarterly.
According to the article written by SVO research analyst Dimitris Karapiperis, the industry has a "relatively modest exposure" to subprime-related investments of $42 billion.
The bulk of this exposure, he found, is through residential mortgage-backed securities, but collateralized-debt obligations represented $719 million for the industry. A total of 92 percent of CDOs were held by life insurers, according to the SVO.
But while exposure to subprime residential mortgage-backed securities seems "relatively low," insurers do have "significant exposure" in other areas, according to the article.
It mentioned residential mortgage-backed [RMBS] and asset-backed securities [ABS] (20.5 percent for life insurers and 14.2 percent for property-casualty insurers) and a nontrivial exposure to noninvestment grade corporate bonds (5.7 percent and 1.9 percent for life and p-c insurers respectively).
The article found that "life insurers have greater subprime exposure than their property-casualty counterparts." Life insurers' total investment in structured products excluding CDOs was 29.7 percent of their overall bond portfolio, or a little over $652 billion, and CDO investment was $16 billion at year-end 2006, according to the article.
One possible reason, it continued, is that better underwriting performance among p-c companies may have minimized the need to go after higher yield.
"The property-casualty industry had a subprime exposure through RMBS of $4.8 billion, 62.7 percent 'AAA,' 16.7 percent 'AA,' and 9.0 percent 'A,'" Mr. Karapiperis wrote in his article.
"Total industry subprime RMBS investment represented 1.6 percent of the industry bond portfolio and just 0.7 percent and 0.3 percent of the industry's total surplus and total cash and invested assets, respectively, the article stated. Including only the companies that had subprime RMBS investments, these percentages increased to 2.5 percent of surplus and 1.1 percent of invested assets," it continued.
"Property-casualty exposure to lower-rated (BBB/BB/B/CCC) subprime RMBS was minimal at $73 million or 0.01 percent of industry surplus and about 0.005 percent of cash and invested assets," according to the article.
The 10 p-c insurance companies with the largest subprime RMBS investment held about 65 percent of the total p-c industry exposure. Their subprime investment holdings ranged from $1.1 billion to $74 million, said the SVO.
Subprime CDOs held by p-c insurers totaled $58 million, 64.6 percent of which was the top-designated NAIC 1 category as of the end of 2006, 10.0 percent NAIC 2, and 25.4 percent NAIC 3, the article said.
Data indicated that subprime RMBS, as a percentage of surplus, was as follows: 19 p-c insurers had exposures greater than 10 percent and 47 had between 5- and 10 percent. The top 10 ranged from 50.9 percent to 11.8 percent.
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