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For much of the past year, securities brokerages and banks had been bearing the brunt of the financial mess caused by the subprime market meltdown.

Now the insurance sector is feeling some pain as the industry's major carriers and brokers report a drop in profits or outright losses in the first quarter. With the exception of AIG, however, industry losses were nowhere near the financial bloodbath affecting the banking sector.

Marsh, pointing to the "asset impairment" of its corporate security firm Kroll, reported a loss of $210 million compared with a profit of $268 million for the same quarter in 2007. Marsh bought Kroll in 2004 for $1.9 billion.

ACE Ltd., the Allianz Group and the Hartford Financial Services group reported lower profits--but profits nevertheless--in the first quarter, compared with the year-ago period, according to financial documents.

Bermuda-based ACE saw profits drop by 46 percent to $377 million in the first quarter compared with $701 million in the year-ago quarter

And Munich-based Allianz Group saw operating profit fall by $1.59 billion, from $4.48 billion to $2.89 billion, a 35 percent reduction, on losses in the stock market.

Hartford Financial Services showed net income of $145 million in the first quarter, an 83 percent reduction from the company's first quarter 2007 net income of $876 million.

AIG was hit hardest. It reported a loss of $7.8 billion in the first quarter, compared with a profit of $4.13 billion in 2007. The announcement promptly earned the carrier a downgrade by several ratings agencies, even as the company said it would recapitalize its base by selling new shares.

But the damage has been done. Class action sharks, smelling blood, are already seeking redress through the courts. Attorneys representing a public safety pension in Florida announced on May 22 a class action suit against AIG on the grounds that it should have done a much better job of managing it investments.

Moody's suffered some reputational and financial injury of its own midway through the second quarter, when it was discovered the firm may have miscalculated some of its securities ratings. Investors sent the stock plunging by more than 20 percent in two days.

But before that event the company reported that the interest rate gaps that were troubling the securities investments of many insurers were beginning to tighten.

"Insurers generally have the ability and intent to hold securities with depressed market prices until prices recover or until maturity," the Moody's analysts wrote.

We certainly hope so for their sake and the good of all concerned.

July 1, 2008

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