Insurance firms walloped

Miami Herald–Mar. 18, 2008
BY ERIK HOLM AND JOSH P. HAMILTON

The collapse of the subprime mortgage market will lead to record losses for insurance companies, overtaking Hurricane Katrina, the worst natural disaster in U.S. history.

The amount of asset write-downs and credit losses reported by the industry has reached at least $38 billion, just short of the $41.1 billion in claims from Katrina, which killed more than 1,500 people and left more than half of New Orleans homeless in 2005, data compiled by Bloomberg show.

American International Group, the world’s biggest insurer, reported the largest quarterly loss in its 89-year history because of the decline in investments linked to mortgages. Chief Executive Officer Martin Sullivan told shareholders last month that more losses are possible amid the most depressed U.S. housing market in a quarter century. The KBW Insurance Index ended 2007 with its worst quarter in five years and fell another 17 percent this year.

”This is a bigger event than Katrina,” said Robert Haines, an insurance analyst at New York-based CreditSights. This is a much more unprecedented event.”

After Katrina, companies including Northbrook, Ill.- based Allstate, the largest publicly traded U.S. home insurer, raised rates in disaster-prone areas, bolstering their balance sheets and stock prices. Now, insurers are stuck holding mortgage-related investments in a market where there are so few buyers that it’s hard to know what those assets are worth.

AIG, Ambac Financial Group and MBIA have reported the biggest markdowns tied to the mortgage markets.

AIG topped the list with $6.7 billion of losses from residential mortgage-backed securities and more than $11 billion from so-called credit-default swaps, which protect fixed-income investors. The New York-based company’s stock fell the most in 20 years on Feb. 11 after auditors found AIG originally used the wrong formula to value its holdings and understated losses.

New York-based Ambac, the second-largest bond insurer, had about $6 billion of write-downs as credit markets deteriorated. Armonk, N.Y.-based MBIA, the biggest bond insurer, suffered losses of more than $3 billion.

The industry tally of $38 billion includes 15 publicly traded companies based in the United States and Bermuda, and excludes policyholder-owned insurers and European companies.

Last year marked the first time since at least 1999 that the combined book value — assets minus liabilities — of the 24 companies in the KBW Insurance Index declined, according to Bloomberg data. The drop was 0.9 percent, compared with a gain of 7 percent in 2005 after the record hurricane season.

AIG’s book value, including minority interest, slipped 3 percent in 2007 to $106.3 billion, compared with a gain of about 8.2 percent the year Katrina hit, according to Bloomberg data.

The company reported adjusted net income of more than $9 billion in 2007, said AIG spokesman Chris Winans.

”That outcome illustrates the virtues of having a diverse portfolio of businesses,” he said.

MetLife and Prudential Financial, the largest U.S. life insurers, added asset-backed holdings before the housing slowdown as they reached for higher return.

Prudential, based in Newark, N.J., had gross unrealized losses of $2.86 billion on fixed-maturity investments as of Dec. 31, a threefold increase from a year earlier. About $1.1 billion of the total is related to subprime mortgages, said spokesman Bob DeFillippo. MetLife, based in New York, reported gross unrealized losses of $4.45 billion, a 95 percent increase, including $219 million from subprime.

AIG, Prudential, MBIA, Ambac and CNA Financial Corp. say damage from the credit markets may decrease over time. That’s because markdowns are pegged to the price insurers could get if they chose to sell securities today in depressed markets — which the companies say they won’t do. They’re planning to hold on and collect the full value.

”I say to our portfolio managers, when you buy something, make sure the credit quality is sufficient that we can hold it to maturity,” said Jim Tisch, the CEO of CNA parent Loews, in a March 6 interview. CNA’s unrealized losses totaled $367 million. The Chicago-based insurer, which also posted realized losses of about $480 million in 2007, declined about 40 percent in the past 12 months.