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I have performed some more digging in the insurance sector, basically looking for the next AIG, and although I am far from finished I thought I would drop a note to the professional level subscribers that extended the general insurance note that I released last week. You may download the note here: pdf Actionable Item (189.75 kB 2008-10-17 11:26:41). In addition to the professional level subscription, you will need Adobe Acrobat Reader version 9 or higher to view this. pdf

Here are a few highlights (keep in mind that the details are reserved for the download):

·        As a result of the continuing financial crisis, the company is recording significant unrealized losses as a result of mark to market adjustment of the general account securities (the portfolio on which the company assumes the credit and the market risk). The net unrealized losses on these securities rose a deafening 550% to 5.2% of the cost as of June, 2008 against 0.8% as of Dec, 2007. As of June 2008, the risky components of $77.6 billion dollar portfolio included $2.04 billion of sub prime RMBS, $2.6 billion of equity securities (79% relates to financial services sector), $15.7 billion of CMBS, $11.7 billion of corporate bonds issued by financial services sector and  $2.9 billion of senior secured bank loans CLOs.
The company’s solvency position is deteriorating as a result of the continuous write downs in the investment portfolio in the form of unrealized losses. An additional 3% move in aggregate asset prices will leave this company insolvent.

·        The continuously slipping market value of the securities is also likely to increase the general account liabilities of the company as the company assumes the risk of paying guaranteed minimum amounts under the various variable annuity products (and/or GICs) which are accounted under the separate account assets and liabilities.

·        The current financial turmoil is also impacting the company’s earnings

­   The unrealized losses in the securities available for sale that are deemed other-than-temporary impairment along with the losses from the fair valuation of derivatives contracts are recorded in the income statement as realized capital loss.

­   The market fall leading to shrinking assets under management both under variable annuities and mutual funds is bringing down the fee income earned.

·        The insurance business is also reporting significant slowdown and shrinking margins.

­   About 75% of the earned premiums are contributed by the Property and Casualty segment which is witnessing a continuous slowdown.

­   The year on year premium growth in the group benefits business (accounting for more than one fourth of the earned premiums) stood at 0.8% and -1.0% in the last two quarters and the net margin falling to 4.0% and 5.3% in the first and the second quarter of 2008 against 6.3% in the fourth quarter of 2007.

·        The company’s net investment income is getting hit by drop in investment yields.

·        Other exposure to possible losses come from the company’s CDS exposure which stood at about $1.8 billion or about 10.4% of the shareholder’s equity.

·        The liquidity position seems weaker with only $2.0 billion in cash over a total asset size of $333 billion.