Insurance Losses Due to Sub-prime Top Those of Natural Disasters

by Nancy Osborne, COO of ERATE

Insurers are now faced with the prospect of having to hold onto mortgage-backed securities in a market where buyers for such investments have all but disappeared. Without buyers it is difficult if not impossible to establish value and on that basis a ripple effect throughout the entire organization occurs without hope of a turnaround. There is much doubt as to whether significant portions of mortgage-backed debt will ever reach maturity unscathed. The continually unfolding developments resulting from the mortgage meltdown are forecast by many within the industry to ultimately produce a bigger hit to insurers than any of the previous natural disasters. Losses resulting from mortgage-backed securities continue to be revised upward from all initial estimates with no end in sight. And for the first time since the late 1990's the book value of 24 companies within the KBW Insurance Index actually declined.

Total industry losses currently exceed $38 billion and that is not where things will likely end. As auditors continue to process the financial standings of the insurers, many are found to have underestimated their losses and incorrectly valued their holdings. Many portfolio managers are now being advised to carefully weigh the credit quality of all that is purchased to insure each acquisition can safely be held to maturity. Markdowns on many of the now defunct mortgage-backed assets will continue to occur as the assets supporting them, namely home values, continue to decline. It is difficult to project when a bottom will be reached and the course reversed as many insurers may continue with write downs resulting in losses spanning the next five years.