They started hearing the first whisperings this spring and began asking for some hard figures.
By the time late summer rolled around, analysts with Moody's Investor Services had canvassed enough U.S. insurance companies to get a decent grip on how many insurers had their toes or other body parts in the quicksand of subprime mortgage exposure.
The answer? Not too many.
"I think the main take-home message is that we don't expect it to be all that material," said Paul Bauer, a New York-based vice president and senior analyst with Moody's, who headed a five-person research team.
The work involved crunching data from public filings and information from answers to questionnaires sent out to the 80 insurance companies that Moody's covers.
Bauer said in many cases insurers have done a good job of coming forward about their subprime investment exposure.
"I think for the most part the companies with the highest exposure have made public disclosure in their earnings calls," Bauer said.
What the Moody's study found was that industry investment in all forms of nongovernment, nonagency, mortgage-backed and asset-backed securities came to about 16 percent. Of that, about 6 percent was tied up in residential mortgage-backed securities, which are known in the investment world as RMBs.
Feedback from insurers indicates that, of that 6 percent, an even smaller chunk, something south of $15 billion of surplus assets, are invested in securities that hold subprime mortgages.
The only wrinkle in the whole fabric is that insurance companies aren't required to break out their subprime exposure in their public filings. Although as indicated earlier, Bauer thinks many have done a good job of coming clean with investors and analysts during their earnings calls.
In particular, Bauer credited New York-based American International Group Inc. for its forthcoming stance. In a related example, in August, AIG's second-quarter report detailed the residential-mortgage exposure of a subsidiary, the United Guaranty Corp.
AIG told the Securities and Exchange Commission that the current downward cycle in the U.S. housing industry and mortgage credit problems would "continue to adversely affect UGC's operating results for the foreseeable future."
From all companies surveyed, Moody's analysts found seven companies that reported substantial investments in securities that fell below the ratings company's top two ratings of Aaa and Aa.
That shaky seven had on average 25 percent to 35 percent of their surplus assets invested in securities that are beneath the top two Moody's ratings tiers.
But of those investments, Moody's found that the majority were in the less risky categories of commercial mortgage backed securities, known to wonks as CMBS, and asset-backed securities. Not one of the insurers that Bauer's group questioned had RMB investments of more than 10 percent in lower rated investment categories.
In short, insurance companies, who are in the day-to-day business of assessing risk, have done a good job of keeping their investment dollars out of the risky subprime arena.
"The conclusion is consistent with our opinion that property and casualty insurers tend to generally maintain conservative investment portfolios, choosing to take risk on the liability side of the balance sheet, rather than the asset side," Bauer's group wrote.
October 15, 2007
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