A.M. Best Special Report: Insurance Industry's Subprime Exposure May Be Modest, But Contagion Is Concern.OLDWICK, N.J. -- As the turmoil from the subprime crisis ripples across the global credit and equity markets and threatens the stability of the U.S. economy, several insurers have announced their exposure to mortgage-linked assets in their third quarter earnings. A.M. Best has been monitoring the industry exposure in the subprime crisis since August 2007. * Given the diversity of life/health insurers' asset portfolios and their enhanced risk management practices, A.M. Best does not expect, at this time, to take negative rating actions due to the effects of the subprime crisis, with the possible exception of a handful of companies with above average exposure. * Demand for title insurance products has slowed significantly in recent months, as evidenced by the decline in title insurance revenues, which tracks the slowdown For articles with similar titles, see Slow Down (disambiguation). A slowdown is an industrial action in which employees perform their duties but seek to reduce productivity or efficiency in their performance of these duties. in mortgage originations. Some title insurers also face higher claim activity from underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. exposure on homes financed with subprime mortgages that have defaulted. * Although the majority of property/casualty insurers' investment portfolios will not be materially affected, A.M. Best believes companies actively writing professional liability coverage are likely to face higher claims activity due to bankruptcies and class-action lawsuits related to the subprime mortgage crisis. * In the near term, A.M. Best expects the balance sheets of certain insurers to be affected as more clarity is gained regarding how subprime and Alt-A An Alt-A mortgage is a type of U.S. mortgage that, for various reasons, is considered riskier than "prime" and less risky than "subprime," the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between that of prime and subprime home mortgage-linked securities are valued. Another concern is the potential for heightened default risk for adjustable-rate mortgages Adjustable-rate mortgage (ARM) A mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or expected to reset over the next 18 to 24 months. * A.M. Best also is concerned about the lack of pricing clarity on mortgage-linked securities and its contagion Contagion The likelihood of significant economic changes in one country spreading to other countries. This can refer to either economic booms or economic crises. Notes: An infamous example is the "Asian Contagion" that occurred in 1997 and started in Thailand. effect on the pricing of other asset classes. Evolving capital market conditions and the potential for increased economic risk and its impact on investment returns will likely remain the dominant investment theme for many U.S. insurers. * Despite these concerns, A.M. Best remains confident in the overall strength and flexibility of U.S. insurance company balance sheets, observing generally modest exposure to subprime investments that seem to be concentrated in the highest credit quality tranches Tranches A piece, portion or slice of a deal or structured financing. This portion is one of several related securities that are offered at the same time but have different risks, rewards and/or maturities. "Tranche" is the French word for "slice". . A.M. Best will continue to monitor the investment environment and what impact exposure to mortgage-related investments will have on insurers it rates. BestWeek subscribers can download To receive a file transmitted over a network. In any communications session, "download" means receive, and "upload" means send. The download/upload often implies a big/little scenario, in which data is being downloaded from the "big" server into the "little" user's computer. a PDF (Portable Document Format) The de facto standard for document publishing from Adobe. On the Web, there are countless brochures, data sheets, white papers and technical manuals in the PDF format. copy of all full special reports at no additional cost or a combination of the PDF copies plus all related spreadsheet spreadsheet Computer software that allows the user to enter columns and rows of numbers in a ledgerlike format. Any cell of the ledger may contain either data or a formula that describes the value that should be inserted therein based on the values in other cells. files of the report data at no additional cost from our Web site at www.bestweek.com. Nonsubscribers can download a PDF copy of the full special report (12 pages) for $55 or a combination of the PDF copy plus the spreadsheet file of the report data for $140 from our Web site at www.bestweek.com. Call customer service for more information, (908) 439-2200, ext. 5742. Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com. |
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