In their prime

August 30, 2007

Whatever the ongoing consternation about U.S. subprime mortgage market and its implications for investors and the economy, the subprime market’s woes seem to be of little immediate concern to the insurance industry, according to the rating agencies.

Last week Moody’s Investors Service Inc. weighed in about insurers’ limited exposure to subprime mortgage-backed investment instruments, and yesterday Standard & Poor’s Corp. offered a similar take.

“Standard & Poor’s Ratings Services has surveyed all the insurance and reinsurance companies it rates globally to determine their exposure to U.S. subprime mortgage-related instruments,” said in its report. “The main conclusion: We expect that these sectors will navigate the recent deterioration in subprime mortgage-related assets with sufficient liquidity to meet their financial obligations.”

S&P said the “vast majority” of insurance companies it rates have “negligible” subprime exposures, and that while a small number of companies had exposures that weren’t negligible, the rating agency considered those companies’ exposures “manageable” because they targeted higher rated classes of instruments in making their investments.

Life companies generally had a higher percentage of subprime exposure, S&P said, though adding that that fact isn’t surprising life insurers’ longer-tailed liabilities, need for longer dated assets and life companies’ pursuits of higher yields. Still, the life sector’s exposure is “relatively modest,” S&P said.

Last week Moody’s said the “vast majority” of U.S insurers have either no exposure or an extremely limited exposure to the subprime mortgage sector. Moody’s based its analysis on a survey of companies and a review of insurers’ statutory financial statements.


Made in China?

August 23, 2007

It’s going to interesting to see what impact the recent flurry of stories of recalled or defective Chinese-manufactured products ranging from toys to toothpaste has going forward.

The most immediate response, it would seem, is likely to come from three sources: businesses forced to decide whether the cost savings they realize by manufacturing in China are worth the potential liability exposure and risk of damaging their brand; consumers, who might look long and hard at the words “Made in China” in the near future when deciding on purchases; and the Chinese government, which no doubt will look to move quickly to prevent having the words “Made in China” come to be equated with poor quality.

Another group likely to respond to the recent developments concerning Chinese made products is insurers. Broker Aon Corp. put out a release recently noting that Chinese manufacturers will need to boost their commitment to quality if they hope to secure product recall coverage.

The insurance industry has been eager to expand into the Chinese markets, but these recent developments have no doubt provided cause for thought. “The issue for insurers and brokers alike is developing recall insurance in a Chinese market that is relatively unsophisticated and only just coming to terms with the concept of product liability, let alone product recall,” Aon said. Insurers will demand testing and controls throughout the supply chain, according to the broker.

Toymaker Mattel Inc. certainly was given its own cause for thought earlier this month when it had to recall millions of toys over the past few weeks. Whether abandoning China as a manufacturing site is even an option for Mattel is open to question–reportedly 65% of the company’s toys are made there. That being the case, it’s likely the toymaker will instead look to ratchet up its quality control process.

It will be interesting to see how consumers respond, especially heading into the holiday shopping season.

And it will be interesting, too, to see what other steps companies selling products manufactured in China might take. I’ve long been interested in Apple’s labeling all its products with the words “Designed by Apple in California.”  Maybe many companies will start stamping their Chinese made products with the words “Made in China, Rigorously Tested for Quality in the U.S.”

Subprime seesaw

August 9, 2007

Boy, soon as it starts to look like the dust may be just about to settle a bit from the subprime mortgage market’s recent woes and resulting concerns surrounding the broader credit markets, something comes along like today’s 387-point drop of the Dow Jones Industrial Average to suggest it might be a while before this is completely resolved.

It was the Dow’s second worst day of the year, and Thursday’s dive came after the market gained more than 153 points Wednesday. At the heart of today’s drop? Subprime mortgage concerns, of course.

The market’s plunge today also provided additional evidence of the global nature of today’s economy. Analysts credited the drop to concerns over Paris-based bank BNP Paribas announcement that it was freezing three funds that have invested in U.S. subprime mortgages, with concerns heightened by the European Central Bank’s move to make $130 billion in overnight funds available to European money markets.

The U.S. Federal Reserve and the Bank of Canada also took steps to inject funds into the money markets.

The rating agencies have been keeping an eye on insurers’ exposure to subprime mortgage investments lately, and several insurers have come forward to discuss the extent of their exposure to ease any potential concerns. Most recently, American International Group Inc. did so today, addressing the issue in a conference call, with company CEO Martin J. Sullivan saying AIG was “comfortable” with the size and quality of its investment portfolios.

In her August Themes on the Economy, Diane C. Swonk, chief economist and senior managing director at Chicago-based Mesirow Financial, addressed the subprime mortgage market meltdown and its impact on the broader economy. While there will be an impact on the housing market, the economist suggests, with potential home buyers facing tighter credit conditions, there won’t be an overall credit crunch.

“Credit is still readily available to credit-worthy borrowers,” Ms. Swonk said, noting, among other factors, that banks are well capitalized, mortgage rates remain low and employment and income growth is solid.

Of course, not everyone is as calm about current credit market conditions. If you haven’t seen the video of former hedge fund manager and CNBC’s “Mad Money” host Jim Cramer’s take in an interview last week, it’s worth checking out.



Irrational exuberance?

August 3, 2007

Back at the very start of this year’s baseball season, I posted an item to the blog examining my experiences as a Cubs fan and the prospects for the 2007 season, and wondering whether it might somehow be possible to insure against heartbreak.

Now, here we are several months on, and the Cubs have actually made themselves look like contenders in the National League’s Central Division. Well, at least until they actually moved into a tie for first place a couple of nights ago, since which time timely hitting seems to have been in short supply and a couple of our relief pitchers have offered ill-timed meltdowns.

This all comes, of course, as the Cubs approach the centennial of their 1908 World Series championship–the team’s last–and with its current owner, Tribune Co., preparing to sell the club at season’s end, possibly to an investor group led by private equity fund head John Canning and including, according to a story in yesterday’s Chicago Tribune, Aon Corp.’s Patrick G. Ryan.

But, as the Cubs and the team’s fans move toward the century mark of their title drought and anticipation mounts about who next will own the historic franchise, it’s August and the Cubs are at least making a show of being in contention. And, lo and behold, Kerry Wood was activated from the disabled list today, taking a relief pitching spot in the Cubs bullpen.

I’m actually pulling for the much injured Wood nearly as much as the Cubs themselves, and tire of those who make it sound as though his injury history and consequent failure to meet his early potential reflect some sort of personal character flaw. The New York Times ran a great piece on Wood, his injuries and his effort to make it back to the majors a couple of months back, and I would think even if you weren’t a Cub fan, reading it would prompt you to wish Kerry luck.

Anyway, aside from the Cubs’ thumping by the Mets today, which left the Cubs a half game behind the Milwaukee Brewers in the N.L. Central as I write this post, there seems to be reason for optimism on Chicago’s North Side. But experience tells me to guard against what former Fed Chairman Alan Greenspan would no doubt refer to as “irrational exuberance.”

So, is there any insurance industry connection in this post? It’s tenuous at best, I’ll admit. Good underwriting and risk management involve understanding experience and history, right? So with that in mind, I’m trying to do the best I can in managing my emotional exposure as this Cubs season moves forward, understanding from experience the risk I’m taking on.


Short memories

August 1, 2007

With what’s typically the busiest period of the year’s hurricane season yet ahead, the Insurance Information Institute sent out an interesting item today noting that last year’s relatively mild hurricane season is apparently prompting some complacency among coastal residents about the risks they might face.

According to the III, a recent survey shows 48% of those surveyed in the South think homes in their state are likely to be damaged by a hurricane, a drop from 55% who thought such damage was likely in 2006–when the 2005 storm season was still fresh in mind.

The survey showed a similar easing of concerns among residents of northeastern states surveyed, with 25% saying they thought homes in their states were likely to be damaged by a hurricane, down from 30% last year.

The III said the figures come from a national public opinion survey conducted for the organization May 17-20 by the Opinion Research Corp.

According to the III, the survey also showed 64% of those polled expecting more severe natural disasters in the future, and 46% saying they’d be willing to pay more for a home built to withstand a natural disaster. Half of those surveyed said they have an inventory of their possessions to document losses following a disaster, the III said, but only one out of five has taken steps to protect their home from a natural disaster.

If the results inspire you to make your own preparations, the III has a variety of disaster preparation tips on its Web site.