March 14, 2008
In the Eye of the Subprime Storm: Mother Nature Can’t Compare to the Disaster Man has Wrought
There’s a new “disaster” that will soon top the record books as the biggest ever to impact the U.S. insurance industry.
No, it isn’t an earthquake in California. And it’s not a Midwestern tornado. It’s not even a Hurricane – that was the previous record-holder.
It is the “collapse of the subprime mortgage market,” which according to Bloomberg is responsible for record setting losses at insurance companies. This disaster of mankind’s own making will soon surpassed even Hurricane Katrina as the worst ever in U.S. history!
The total amount of outright losses and asset write-offs reported by U.S. insurers has so far reached $38 billion. That’s just shy of the $41.1 billion final tally for insured loss claims from Hurricane Katrina, which devastated New Orleans and the Gulf Coast in 2005.
And there’s little doubt about more subprime losses to come.
In fact, ratings agency Standard & Poor’s has either “downgraded or placed under review more than $350 billion of collateralized debt obligations.” It’s a sure-thing that at least some of this toxic debt will default prior to maturity.
In fact, default rates on some of Wall Street’s existing subprime CDO’s are running above 20%! Should the CDO’s currently “under review” at S&P suffer the same default rate, about $70 billion in additional losses will result!
I’m not certain exactly how much of these losses would be insured, but suffice it to say that Katrina’s $41.1 billion record is about as safe as Hank Aaron’s home-run record was last season.
At least there was a silver-lining for insurers after Katrian. The industry easily pushed through rate increases in disaster-prone areas – like my homeowners policy here in Florida which went through the roof. Higher insurance premiums boosted balance sheets and stock prices for U.S. insurance companies, and led to record profits.
Today by contrast, “insurers are stuck holding mortgage-related investments in a market where there are so few buyers that it's hard to know what those assets are worth,” according to Bloomberg. In fact, 2007 was the first time in eight-years that the combined book value (assets minus liabilities) of firms in the KBW insurance industry index actually declined on a full-year basis.
This is indeed a “disaster” for the U.S. insurance industry, and the storm has not yet passed.
There are an estimated $1.7 trillion in subprime adjustable rate mortgages scheduled to reset to much higher interest payments in 2008! This will surely result in billions more of asset backed losses over the next 12-months.
Bottom line: we’re now in the eye of this man-made hurricane. But watch out for the devastating winds in the backside of this subprime storm!
burnickblog.sovereignsociety.com
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