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The chaos in the subprime mortgage marketplace is expected to affect few property/casualty insurers in the short term, a new report found, but the next 18 to 24 months could be rough, particularly for life and health carries with too much exposure to mortgage-backed securities.

Aggregate exposure to subprime and so-called Alt-A residential mortgage loans, as a percentage of invested assets, was about 5 percent, according to data compiled from an A.M. Best survey of 83 life and health insurers.

By contrast, only 2 percent of invested assets of 191 U.S. property/casualty insurers surveyed were exposed to subprime and Alt-A securities, the survey found.

Nearly 30 percent of the survey respondents reported their investment portfolios had no exposure, and nearly 70 percent reported subprime and Alt-A exposure of between 1 percent and 10 percent of invested assets, according to the A.M. Best report.

Aside from some foreign carriers, which announced losses in the fourth quarter of 2007, "when we look at some of the information provided by the insurance companies, there isn't a whole lot that we could see that is going to have a compelling effect on their earnings or surplus," said Dan Ryan, vice president of A.M. Best.

Many property/casualty carriers, Ryan also said, have avoided big losses because oversight at the federal level by the National Association of Insurance Commissioners and at the state level by individual insurance departments has precluded many carriers from investing in securities with too much risk.

By contrast, financial services giants like Merrill Lynch, Citigroup and Morgan Stanley have reported trading losses and write-downs of more than $40 billion due to mortgage borrowers with poor credit and are unable to make payments on their loans.

Insurers and reinsurers haven't been immune to the subprime mess. Swiss Re announced a $1.07 billion loss in November due to exposure to the U.S. subprime mortgage market. But the Zurich-based reinsurer also noted that previous profits from paying fewer catastrophe claims thanks in part of a mild Atlantic storm season would help absorb the subprime blow.

Looking ahead to 2008, a write-down affecting one to two quarters isn't expected to "bring down" a company because 2006 was a year of record profits for the industry, and because insurers look as if they will once more turn a healthy profit in 2007, Ryan also said.

But for insurance companies heavily exposed to directors' and officers' liability, the future looks more unsettled.

February 14, 2008

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