Insurers Have Manageable Exposure to Subprime Turmoil

September 18, 2007

The vast majority of U.S. insurers have little or no exposure to the volatility in the subprime mortgage market because a substantial percentage of their investments are in the highest-rated bonds or stocks with no direct ties to lenders, an Insurance Information Institute (I.I.I.) white paper reported.

“This conclusion is based on the recognition that both by law and by the nature of their business, insurers generally limit themselves to the low-risk end of the investing universe. Even for the very small share of their investments directly exposed to subprime and near-prime loans, insurers mainly invest in ‘slices’ of those investments that, according to the bond-rating agencies, are as safe as the safest corporate bonds,” writes Dr. Steven Weisbart, the I.I.I.’s vice president and chief economist. “Thanks to conservative portfolio management strategies and restrictive state regulations, insurance companies have a very small portion of their total investments in risk loans of any type.”

The I.I.I. report notes that about 53 percent of life/health insurers’ invested assets were in the highest-rated class of bonds and 19 percent were in the next highest-rated class as of year-end 2006. The comparable percentages for the invested assets of property/casualty insurers in the bond market were 67 percent and 4 percent, respectively, the white paper says.

“Common and preferred stocks are a small part of the investments of life/health insurance companies, at 4.6 percent of net admitted assets, as of year-end 2006,” Dr. Weisbart adds. “They are a moderate part of the investments of property/casualty companies, at 16 percent, as of year-end 2006.” While a comparatively small percentage of insurers’ investments, insurers do have sizable equity stakes in U.S. markets. U.S. life/health insurers, for instance, cumulatively owned preferred and common stocks valued at $138 billion as of Dec. 31, 2006, according to the National Association of Insurance Commissioners’ (NAIC) annual statement database. This figure stood at $237 billion for U.S. property/casualty insurers, as of year-end 2006, the NAIC reported.

“Insurers’ portfolios are still vulnerable to broad market sell-offs caused by fears originating in the subprime sector, such as occurred during July and August 2007,” Dr. Weisbart states. “Nevertheless, direct losses will be very limited and insurers’ tendency to hold securities on a long-term basis implies that the effects of short-term market volatility will likely be minimal.”

The I.I.I.’s analysis of the subprime mortgage market’s recent turmoil did hold out the possibility that claims may be filed by directors and officers (D&O) liability insurance policyholders as well as those with errors and omissions (E&O) coverage.

“It is likely that some actions will be brought that will trigger the defense benefits in these policies, and possibly also some payouts under the liability benefit provisions. Typically, these claims take a long time to develop. As such, it is much too early to estimate the dimensions of the claims experience that may emerge from the recent credit market developments,” Dr. Weisbart writes. “Major providers of D&O coverage tend to be among the largest and most financially sound insurers.”

Dr. Weisbart’s white paper, “Subprime” Home Mortgage Loans and the Insurance Industry, was released publicly yesterday.

Source: I.I.I.,

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