The Next Bailout Target: Commercial Insurers

In addition to above-average catastrophe losses in 2008 and the increasing severity of investment losses through year-end and the first quarter of 2009, Moody’s expects that these pressures will likely continue to expose commercial P&C insurers to a degree of credit erosion over the medium term. This outlook expresses Moody’s expectations for fundamental credit conditions affecting this industry sector over the coming 12-18 months.

Moody’s noted that further deterioration in investment portfolios, outsized catastrophe losses, and the potential for significant litigation costs relating to corporate bankruptcies and the sub-prime mortgage crisis all could place additional strain on the sector over the intermediate term, particularly if capital market access remains frozen for a prolonged period.

"Moody’s currently believes that commercial insurers hold adequate overall reserves for their expected ultimate policy liabilities" Mr. Murray says. "However, we also believe that the redundancy margin has thinned to a level at which earnings could soon cease to benefit from reserve releases, thereby adding significant pressure to insurers’ underwriting margins."

"Macroeconomic stress and contraction will likely reduce business volume over the intermediate term, and will continue to pressure insurers’ asset quality and capital strength. The impact of these pressures, however, should be muted somewhat by reduced exposure levels, given a smaller employed workforce and lower levels of commercial activity" notes Mr. Murray.

"Together," the analyst says, "the combined multi-year trends of weakened pricing and depleted reserve redundancies, as well as recent catastrophe losses and ongoing investment-related strains, have compressed commercial insurers’ risk-adjusted capitalization in 2008. Looking ahead, ongoing strain on investment valuations, reserve margins, and embedded underwriting profits will likely continue to pressure risk-adjusted capital levels through 2009."

Moody’s has failed to observe the fact that AIG is also making business for all its competitors impossible as taxpayers have provided for insurance policies in which AIG ends up paying you … However, a bigger issue is that Timmy will likely wake up and realize this next upcoming "shoe drop" threat, and throw yet another cool $100 billion at the fire. It’s only money, and as we have already passed the $1 trillion deficit mark, what is a mere $100 billion. In Zimbabwe you can barely buy 4 loaves of bread with that.