Update of Subprime Mortgage Related Losses for Select U.S. Insurers:
As of Nine Month 2007 GAAP Reporting
(November 19, 2007)
A BISM Online contribution from ALIRT Insurance Research, LLC

David Paul and Dan Hausmann are principals of ALIRT Insurance Research, Inc., a Windsor,CT based research firm offering customized credit analytics and competitive intelligence on insurance carriers and the broad insurance industry.

This review updates disclosures regarding subprime and Alt-A mortgage-backed securities (and related CDOs) for a number of public U.S. insurance companies, as reported in their third quarter 2007 GAAP earnings releases, conference calls, and/or 10-Q SEC filings¹. A detailed list of company releases related to such losses is provided in the Appendix.

Over the past several months we have continued to observe the current and potential near to medium term impact on insurers. There are three issues at hand for insurers: 1) direct investment losses, 2) potential claims for D&O and E&O policies for P&C insurers, and 3) potential collateral damage should the broader economy be affected.

Direct Investment Losses

At this time, absolute losses from bonds backed by subprime mortgage loans are unlikely to present a major credit issue for the insurance industry or for most individual companies. While it is clear that insurers, due to their considerable investment heft, will sustain at least some losses from these assets, they are not expected to be material relative to individual companies' capital positions.

As life insurance companies are more asset-intensive than property/casualty or health companies, they constitute the lion's share of subprime mortgage-backed security investing for the insurance industry. Also, asset leverage for life companies is much higher than for P&C or health insurers, and thus the magnitude (relative to capitalization) of any investment losses on subprime is likely to be greater for life insurers.

With that being said, we note that life insurance industry capitalization measures are at the strongest level in the last five or six years, and thus the industry, and most companies, are in a relatively good capital position to begin to address any losses from subprime mortgage-backed securities.

Claims on D&O, E&O Policies

In light of the large aggregate losses and writedowns reported by some financial services firms, sharply deteriorating operating results for other companies affected by the mortgage industry turmoil (home-builders, etc.), and perhaps especially the steep declines in stock price for these and other companies touched by the subprime issue, investor-based lawsuits are all but certain for alleged financial misstatements, misleading/improper/incomplete disclosures, etc.

As mentioned above, P&C insurers' capital positions are more insulated from actual investment losses, due to the much lower asset leverage for P&C insurers than is usually the case for life insurance companies. However, the potential for claims from these types of policies falls squarely on the shoulders of P&C (re)insurers. A recent Guy Carpenter review estimates potential losses from such claims of $2 billion in 2007 and $3 billion in aggregate.

The pricing environment for commercial lines insurance generally, and professional liability lines (D&O, E&O, etc.) specifically, has been soft for the last few years, and it is not likely that claims from subprime will move pricing higher, either for direct writers or for reinsurers. This is in part due to the much improved capitalization in the P&C industry, and the solid profitability over the last few years.

On a positive note, the solid profitability and capital formation of recent years has improved the balance sheet strength of the P&C insurance industry considerably, and as a result, the P&C insurance industry approaches the current market turmoil from a relatively sound financial profile.

Collateral Damage

If the problems in the subprime mortgage market continue, and especially if they extend to the prime mortgage sector, this could have ramifications for the U.S. and possibly world economy. Such a scenario could negatively impact equity markets, lead to lower interest rate environments, accelerate bond credit defaults, and/or impede the availability of credit generally (further depressing economic performance). If any or all of these factors came to pass, the insurance industry could be impacted more significantly from an earnings, investment income, and capitalization standpoint.

Already, the volatility of equity markets has increased dramatically from the relatively low volatility experienced in 2004-2006. This boosts the cost of financial derivatives, and as these instruments are used by many variable and indexed annuity writers as part of their dynamic hedging programs, the cost of doing business for these insurers has risen, and thus profitability could be reduced for these business lines.

Recent Developments Regarding Subprime

Since the initial subprime scares in early 2007 and especially in the summer (in the weeks surrounding the second quarter 2007 earnings reports), the issue waned somewhat (September-October), before flaring up again in the last several weeks, beginning around the third quarter GAAP earnings season. Extremely large realized losses were reported by some of the country's largest commercial and investment banks (Merrill Lynch, Citigroup, Bear Stearns, HSBC, Bank of America, etc.), which resulted in several high profile management shake-ups. Equity markets became jittery and the Federal Reserve lowered its key lending rate another 25 basis points on Halloween in an attempt to calm recession fears as liquidity remained tight.

Last week the market received another jolt as the major public rating agencies began raising credit concerns about the principal financial guaranty insurers. The largest of these so-called "mono-lines" carry the maximum possible AAA-credit ratings from the major public rating agencies. Should a AAA rating be lowered for any of the "mono-lines", it could potentially result in a wide swath of downgrades and credit losses on instruments guaranteed by these carriers, which could further tighten credit across the economy and/or widen spreads across all fixed income investment sectors. As a result of these concerns, stock prices for the "mono-lines" (including MBIA and Ambac among others) dropped precipitously this autumn and have yet to recover meaningfully for any of them.

At the same time, the major rating agencies continue to examine the ratings of a wide range of mortgage-backed securities as well as other structured securities (including CDOs) and asset-backed commercial paper with underlying exposure to subprime mortgages. Further downgrades of these instruments would likely have ripple effects throughout the market such as we have experienced thus far.

Insurance Company Accounting for Asset Impairments / Reductions in Asset Values

As can be seen in the individual company results listed in the Appendix, investment losses are being reported on both a realized (sales or impairments) and unrealized basis. One of the challenges for companies reporting in the present environment is determining the fair market value of some of the distressed securities tied to subprime mortgages for which an active market is lacking. An additional difficulty is trying to assess if a particular security, such as an ABS or CDO backed by subprime mortgage loans, is permanently impaired, given the on-going development of both delinquencies/foreclosures in the subprime mortgage markets.

Unrealized Gains/Losses

GAAP accounting allows for either amortized or fair market reporting based on how a security's holding is characterized². A recently released GAAP standard³, which takes effect for financial statements beginning after November 15, seeks to further clarify derivation of fair value and could have an impact on how unrealized gains/losses are determined and reported for the fourth quarter 2007.

Companies reporting individual insurer results on a Statutory Accounting Principals (SAP) basis⁴ will likely show different results as the treatment of security valuation differs from GAAP. The largest difference is that the NAIC's Securities Valuation Office (SVO) determines both a securities designation (Classes 1-6), and the fair value of most securities. According to SAP rules, the carrying value of bonds with an 1-2 NAIC Class rating are reported at amortized cost, while securities with an NAIC Class 3-6 are carried at the lesser of amortized cost or fair value. Any changes to the fair value of Class 3-6 structured securities reported in the NAIC Valuation of Securities Database will need to be applied accordingly. This could result in unrealized capital losses reported for those securities that are downgraded below investment grade. However, in general we expect larger and more volatile unrealized losses for insurers on a GAAP basis than on a statutory basis.

Realized Gains/Losses

Given the lack of active market inputs for some subprime-related securities, or extremely depressed market valuations, discretion is sometimes left to reporting entities to determine other than temporary impairments to investment holdings in GAAP accounting. This may involve the use of proprietary models that look at a host of factors, including but not limited to current cash flow experience for the security, public ratings, collateral and other credit enhancement, interest rates, liquidity factors, seasoning of the underlying collateral, potential interest rate reset dates, etc. The impact of current market dislocation for many subprime-related securities on future reported realized gains and losses remains fluid.

On a SAP accounting basis, some of the concerns stated above apply as well. Under SAP, an impairment occurs when it is "probable" that the insurer will not collect amounts due on the debt security. This obviously leaves some wiggle room for internal analysis of a number of factors before making a determination of permanent impairment and taking a realized capital loss.

Conclusions

We continue to believe that direct investment losses from subprime mortgage-backed securities will generally remain contained. However, in light of the considerable heft of many insurers, some losses are likely to be significant in aggregate dollars, and may garner attention from the rating agencies and/or especially the financial press. Also, as a substantial volume of subprime loans will reach their rate reset dates in 2008, it seems plausible that defaults on subprime loans have not yet hit their peak.

It is interesting to note that only 9 of the 31 companies listed in the Appendix reported realized losses for subprime mortgage-related securities. With markets for certain of these securities dried up, taking realized losses on sales may be difficult, but even permanent write-downs seem scant. The unrealized losses reported under mark-to-market GAAP accounting could later result in permanent impairments or could reverse, if only in part, should current market values of certain securities rise.

As for indirect losses, P&C insurers writing professional liability policies such as D&O or E&O lines could experience claims from the investor-based lawsuits that are likely to result from the subprime turmoil. Additionally, all insurance companies could be impacted if the troubles with subprime mortgages lead to an economic downturn, material equity market decline, credit defaults, continued tightening of credit or asset liquidity, or other dislocation.

In spite of the above, we note that while life and P&C earnings may have peaked, the insurance industry approaches the current market turmoil in fairly good financial health, with strong capital positions, reasonable statutory profitability, and asset risk levels that are generally at decent levels relative to insurer capitalization.

* * * * *

APPENDIX

Specific Insurance Holding Company Commentary Regarding Exposure to Securities backed by Subprime Mortgage Loans (NOTE: Many holding companies include Life, Property & Casualty and/or Health Ins. Companies)

Based on Third Quarter 2007 GAAP Earnings Releases and Conference Calls, and 10-Q Reports based upon September 30, 2007 financial results.

Please note that each company's methodology for calculating exposures may be different, making company-by-company comparisons difficult.

AEGON

• AEGON's subprime portfolio totaled $4.3 billion at 9/30/07, which equaled 2% of AEGON's total general account investments. Management noted in its conference call presentation that the market value of these holdings was at 95% of nominal value and that 99% of these securities were rated AAA or AA.
• The company experienced no impairments on its subprime portfolio in the third quarter. Further, less than 2% of the portfolio had been downgraded as of 9/30/2007, with none falling below A+ rating after the downgrade.

AETNA

• Aetna did not experience any material losses from the subprime lending market as of 9/30/07.

AFLAC

• "We have no direct investment exposure to the subprime lending market. In light of recent market activity surrounding the subprime lending market, we have performed a review of our investment portfolio and have not identified any material indirect exposure to that market."

AIG

• AIG had $25.9 billion (2.6% of general account assets) of exposure to subprime RMBS at 9/30/07 in its insurance investment portfolios, down from $28.7 billion at 6/30/07. 85% and 13% of these securities were rated AAA and AA, respectively, at 9/30/07. These holdings were weighted 45% in 2006 and 22% in 2007 vintages. Management further stated that $622 million of its subprime securities were downgraded since the end of the second quarter (through 11/8/07).
• The company held $26 billion in Alt-A RMBS securities (equal to 2.6% of general account assets) at 9/30/07, up from $21 billion at 6/30/07.
• AIG also had $3.8 billion worth of ABS CDOs (0.4% of general account assets) which had some subprime collateralization at 9/30/07.
• AIG realized $864 million in capital losses in the third quarter of 2007, $176 million of these related to the RMBS portfolio. Of the $176 million, $27 million was from the sales of securities and $149 was from other than temporary depreciations of securities.
• AIG also had gross unrealized losses of $2.7 billion relating to its investments in RMBS and CDOs at 9/30/07.
• AIG's exposures as stated above are all at amortized cost. AIG states that it currently intends to hold these securities to full recovery and/or full payment of the principal and interest, and therefore expects that any mark to market effect will result in only a temporary adjustment to shareholders' equity.
• AIG had $993 billion in general account invested assets and $104 billion in shareholders' equity at 9/30/2007.

Allianz

• Allianz held ABS with "virtually no subprime components" in its insurance business at 9/30/07. However, the company also stated that it held approximately 2 billion ($2.9 billion) of ABS with subprime exposure relating to its Dresdner Bank arm.
• Dresdner Bank took write-downs of 416 million ($594 million) on its portfolio of ABS in the first nine months of 2007. The company did not indicate how much of its write-downs were directly related to its subprime holdings.
• Allianz had 1.1 trillion ($1.6 trillion) in general account assets and 49 billion ($70 billion) in shareholders' equity at 9/30/2007.

Allstate

• Allstate held $4.4 billion of subprime residential mortgage securities at 9/30/07, which represented 3.1% of general account assets. At 9/30/07, Allstate's subprime RMBS were all rated A or above, with over 93% rated AAA or AA. Allstate also held $1.3 billion of Alt-A RMBS (half fixed, half adjustable), which equals 0.9% of general account assets at 9/30/07. The company also had $84 million of asset-backed CDOs with subprime exposure at 9/30/07.
• Management states that through 9/30/07, there were no writedowns taken related to subprime RMBS, asset-backed debt obligations, or Alt-A RMBS. Management stated in its third quarter 2007 earnings conference call (held in mid-October) that it does not expect any other-than-temporary impairments of these securities. Further, management expects to receive all payments on these securities in accordance with their original terms (owing to the seniority of their securities' claim on the underlying collateral). There were not any downgrades of these securities through mid-October 2007, and management does not anticipate any downgrades to below investment grade in its subprime RMBS or Alt-A portfolios.
• Unrealized losses totaled $226 million on subprime RMBS at 9/30/07, up from $37 million at 6/30/07, while unrealized losses on Alt-A loans rose from $5 million to $18 million. Unrealized losses rose more sharply for ABS CDOs, from $7 million to $54 million. The market value of ABS CDOs is now only $84 million as of 9/30/07.
• Allstate had general account assets of $144 billion and shareholders' equity of $22 billion at 9/30/07.

American Equity Investment Life

• At September 30, 2007, AEL had no exposure to subprime mortgage-backed securities and limited exposure to "Alt-A" mortgage-backed securities.
• As of 9/30/07, the company's "Alt-A" mortgage-backed securities are comprised of 16 securities with a total fair value of $155 million, with agency ratings of Aaa, of which 51% was in Aaa super senior tranches and the remainder was in Aaa tranches.

American Financial Group

• Investments in securities with subprime asset-backed collateral totaled $498 million or 3% of total fixed maturity portfolio at 9/30/07. The net unrealized loss on these investments was $11.3 million at 9/30/07. The securities are collateralized by fixed-rate mortgages.
• Management notes that as a result of the company's conservative investment approach, it has experienced no downgrades and has realized no impairment losses on the subprime securities held in their portfolio.
• AFG had $25.4 billion in general account assets and $3 billion of shareholders' equity at 9/30/07.

Ameriprise Financial

• Management states that Ameriprise has very little exposure to the subprime market and to the broader residential real estate market. As a result, they have not had to write down the value of any assets. Additionally, Ameriprise's subprime and Alt-a securities did not experience any rating downgrades in the third quarter 2007.
• Subprime exposure continues to be limited, with only $260 million of subprime residential mortgage backed securities (0.5% of general account assets) at 9/30/07. Management states that these securities are high quality, predominantly AAA rated bonds, backed by seasoned traditional first lien subprime collateral. They include both floating rate and short duration fixed securities, with an aggregate market value of around 98% of book value at 9/30/07.
• Alt-A residential mortgage-backed security exposure was $1.1 billion (2.3% of general account assets) at 9/30/07, with the vast majority of such securities rated AAA at that time. Management states that the majority of the company's AAA-rated RMBS are super senior, meaning they have more collateral support and credit enhancement than even a "standard" AAA-rated security.
• AMP had $47.5 billion in general account assets and $7.8 billion in shareholders' equity at 9/30/07.

AXA (files semiannual financial results)

• AXA had 2.2 billion ($2.9 billion) in subprime RMBS at 6/30/07 which represented 0.4% of general account assets, with 92% of such securities rated AAA or AA. The company also had 108 million ($146 million) of Alt-a RMBS at 6/30/07. Of the total RMBS holdings, 65% are 2006 or 2007 vintage.
• Total CDO exposure at AXA was 1.6 billion ($2.2 billion) at 6/30/07, which comprised 0.3% of general account assets. However, only 28% of these securities were rated AAA or AA at 6/30/07. The company also had a total of 2.4 billion ($3.3 billion) worth of CLO exposure or 0.4% of general account assets at 6/30/07, with 50% rated AAA or AA at that time.
• AXA had 552 billion ($743 billion) in general account assets and 46 billion ($62 billion) in shareholders' equity at 6/30/07.

Conseco, Inc.

• Conseco held $149 million of subprime RMBS at 9/30/07, with an aggregate unrealized loss position of $32 million. CNO's subprime securities were significantly reduced during the quarter, down from the $305 million held at 6/30/07. The ratings on these securities are weaker than some of its peers, with 22% rated AAA, 30% rated AA, and 42% rated A.
• During the third quarter Conseco had a realized loss of $29 million on the sales such securities. The company also agreed to an annuity coinsurance agreement which led to the transfer of $61 million (book value) of subprime loans to Reassure America Life (a unit of Swiss Re).

FBL Financial

• Subprime holdings are limited to three securities with a total market value of $29 million at 9/30/07, just 0.2% of total investments. These issues are all rated AAA, are fixed rate, were originated in 2005 or before, and have subordination levels that have increased since they were originally purchased.
• FBL held $572 million in Alt-A MBS and $197 million in Alt-A ABS at 9/30/07, with total unrealized losses for these investments of $10 million and $8 million, respectively.
• CDO exposure is small, totaling $40 million or 0.4% of FBL's investment portfolio as of 9/30/07. Only one of the CDO investments has exposure to subprime market with just a portion of it backed by subprime collateral. The company also says that it does not have any exposure to ARMs.

Genworth

• Genworth had $1.8 billion of investments backed by subprime assets at 9/30/07, which represented 1.8% of general account assets. These investments had total gross unrealized losses of $258 million on 9/30/07 (up from $26 million on 6/30/07). Of the $1.8 billion in subprime mortgage loans, 70% were rated AAA or AA and 25% were A as of mid-October 2007. The holdings were comprised of $568 million (32%) in 2006 vintage subprime mortgage loans at 9/30/07.
• Genworth also had $1.6 billion of Alt-A backed assets comprising 1.6% of general account assets at 9/30/07. These investments had $65 million of gross unrealized losses on 9/30/07 (up from $28 million on 6/30/07). Of the $1.6 billion Alt-A backed assets at 9/30/07, 81% were rated AAA or AA, and $364 million were 2006 vintage.
• Genworth incurred $16 million (after-tax) of total impairments in the third quarter 2007, of which $11 million related to losses on securities backed by subprime and Alt-A residential mortgage collateral. Looking at gross unrealized losses, market values declined from 99% of amortized cost in June to 87% in September for subprime and from 98% to 96% of amortized cost for Alt-A. Management currently expects to hold these securities to maturity and is comfortable with the external valuation data used to set market values.
• Next, recent capital markets conditions also have constrained the asset-backed market. Management views these constraints as short-term and that market conditions will normalize and plans for new securitizations are moving forward.
• It should also be noted that Genworth has other exposure to the subprime market with its involvement in the mortgage guaranty business.
• Genworth had $101 billion in general account assets and $13.3 billion in shareholders' equity at 9/30/07.

Hartford Financial Services

• As of 9/30/07, Hartford's subprime mortgage loan exposure was $2.9 billion or 1.8% of general account assets, and the company had unrealized losses of $190 million as of 9/30/07. Holdings were 89% rated AA or above and 40% in 2006 or 2007 vintage years at 9/30/07. Included in the total subprime exposure is $268 million in second lien exposure.
• The company also had $343 million of securities backed by Alt-A residential mortgages, comprising 0.2% of general account assets at 9/30/07.
• The Hartford had $159 billion in general account assets and $19 billion in shareholders' equity at 9/30/07.

ING

• ING had 3.1 billion ($4.4 billion) in subprime exposure at 9/30/07, which equaled 0.24% of total assets. Net impairments amounted to 2 million through the end of the third quarter. The subprime RMBS portfolio was fair valued at 96% at 9/30/07 compared to 98% in July as lower interest rates partly offset credit-spread widening. That resulted in a negative revaluation of 122 million before tax.
• ING's Alt-A RMBS exposure was 27 billion ($38 billion) or 2.1% of total assets at 9/30/07. The portfolio's fair value was 98% at the end of the third quarter versus 99% in July and no impairments were taken.
• No material impairments or revaluations on U.S. subprime or other troubled asset classes were taken during the quarter.
• ING had general account assets of 1.3 trillion ($1.9 trillion) and shareholders' equity of 38.9 billion ($55.5 billion) at 9/30/07.

Lincoln National Corporation

• LNC had a total of $797 million in subprime exposure which comprised 0.8% of general account assets at 9/30/07 (down from $832 million at 6/30/07), of which $6 million were RMBS, $788 million were ABS, and $3 million were CDOs with subprime exposure. These securities were in an unrealized loss position of $46 million at 9/30/07. 82% of these securities were rated AAA at 9/30/07. The company held relatively older vintage securities, with only 19% of exposures issued in 2006 & 2007.
• Alt-A holdings amounted to $1.4 billion or 1.4% of general account assets at 9/30/07, with $1.0 billion of RMBS and $0.4 billion of ABS. These securities were in an unrealized loss position of $46 million at 9/30/07. 78% of these holdings were rated AAA and 18% were rated AA as of 9/30/07.
• LNC may also have exposure to these classes of securities in its alternative investments in limited partnerships, but it is not aware of any material exposure at this time.
• Lincoln National had $99 billion in general account assets and $12 billion in shareholders' equity at 9/30/07.

Manulife

Information from 3Q2007 Conference Call
• Manulife says it is gradually reducing the size of its portfolio of subprime mortgages, as about $40 million per month matures, but management has little concern as to the quality of these assets at this time.
• "Most of it was underwritten over two years ago and we're in the high-quality tranches, so we're not anticipating any significant losses associated with our subprime portfolio."
  Information from 2Q Conference Call
• At 6/30/07, Manulife stated that it had $860 million of exposure to subprime residential mortgage-backed securities. Management stated that its average credit rating was AA and that its investments suffered limited downgrades up to 6/30/07.
Manulife did not discuss its subprime exposure in much detail in its 3Q2007 conference call and did not mention its subprime exposure in its third quarter presentations or investor supplements.

Mass Mutual

• Mass. Mutual held $1.1 billion (statement value) of subprime residential mortgage-backed securities as of 9/30/07. Management stated that of its total subprime holdings, 81% are rated AAA and 14% are rated AA.
• Management further stated that losses on subprime residential mortgage-backed securities to date have not been material to the company's financials and have largely been offset by gains in other parts of the portfolio.

MetLife

• MetLife held $2.4 billion in ABS supported by subprime residential mortgage securities at 9/30/07, which comprised less than 1% of total invested assets and equaled 7% of shareholders' equity. Unrealized losses relating to subprime RMBS increased from $29 million at 6/30/07 to $125 million at 9/30/07, due to widening of spreads. There were no writedowns or realized losses relating to subprime RMBS.
• At 9/30/07, management states that 97% of subprime holdings were rated AAA, AA or better. Of the $79 million of subprime securities rated A or below, 77% were issued in 2004 or previous years, when underwriting guidelines in the housing market were stronger, and home price appreciation in aggregate is higher.
• MET's holdings of Alt-A residential mortgage backed securities declined slightly in the third quarter to $6.6 billion (1.6% of general account invested assets), down from $6.9 billion at 6/30/07. Management stated, during the third quarter conference call, that all Alt-A loans are rated AAA, with 86% having enhanced credit enhancements above and beyond a "standard" AAA security. Unrealized losses for MetLife's Alt-A holdings totaled $38 million at 9/30/07, down from $39 million at 6/30/07. There were no holdings backed by second liens or option ARM loan structures.
• CDOs: At the end of the third quarter, MetLife had $62 million of CDOs backed by subprime residential mortgage loans, down from $83 million at 6/30/07. Management stated, during the third quarter conference call, that 96% of these were rated AAA or AA. One position was sold in the third quarter, which generated a $5 million realized loss, and the company booked a $10 million impairment. There were $4 million of unrealized losses relating to spread widening.
• MetLife had $402 billion of general account assets and $35 billion of shareholders' equity at 9/30/07.

National Western Life Insurance

• At 9/30/07, NWLIA held investments in ABS collateralized by subprime mortgages with a carrying value of $55 million, which was less than 1% of invested assets. None of these securities were rated below AAA and over 50% were insured at 9/30/07. In addition, all of these holdings were purchased prior to 2005.

Nationwide Financial Services

• The company's subprime exposure was $864 million or 1.8% of general account assets at 9/30/07. 79% and 20% of these securities were rated AAA and AA, respectively, at the end of the quarter. 58% of these securities were originated before 2005.
• Alt-a exposure was $2.1 billion or 4.4% of general account assets at 9/30/07, virtually all of which was rated AAA. 25% and 19% of these holdings were 2006 and 2007 vintage, respectively.
• NFS had $5.3 billion of shareholders' equity and $47.7 billion of general account assets at 9/30/07.

Phoenix Companies

• The company's subprime holdings had a market value of $272 million as of 9/30/07, down from $282 million at 6/30/07. 97% of the subprime securities were rated AAA or AA as of 9/30/07.
• Further, the company's Alt-A exposure had a market value of $312 million as of 9/30/07, compared to $333 million at 6/30/07. 90% of these securities were rated AAA or AA as of 9/30/07.
• Management states that it has only one CDO that contains subprime mortgages, where the potential exposure is $17.5 million.

Principal Financial Group

• Principal did not mention its subprime exposure in its conference call, 10Q, or 3Q financial supplement.

Protective Life Corporation

• At 9/30/07, Protective had $86 million in subprime exposure, which comprised 0.2% of general account assets. 98% of these securities were rated AAA at the time.
• The company also had $279 million in Alt-A exposure at 9/30/2007, which represented 0.7% of general account assets. At the end of the quarter, 40% and 60% of the company's Alt-A securities were rated AAA and AA respectively.
• PL had $38.2 billion in general account assets and $2.4 billion in shareholders' equity at 9/30/07.

Prudential Financial

• Prudential's financial service business had $8.3 billion of subprime holdings at amortized cost as of 9/30/07, down from $8.5 billion at 6/30/07. As of 9/30/07, 90% of these holdings were rated AAA or AA, but 57% are 2006 vintage and 15% are 2007 vintage, representing a significant portion of investment when underwriting standards had deteriorated. Gross unrealized losses relating to these holdings totaled $300 million at 9/30/07.
• Prudential's closed block business had $6.7 billion of subprime holdings at amortized cost as of 9/30/07, down from $6.8 billion at 6/30/07. As of 9/30/07, 98% of these securities were rated AAA or AA, but 61% of these securities were 2006 vintage and 15% were 2007 vintage. Gross unrealized losses to these holdings were $181 million at 9/30/07.
• Prudential had $285 billion of general account assets and $23 billion of shareholders' equity at 9/30/07.

Reinsurance Group of America

• At 9/30/07, RGA had $255 million of investment securities with subprime exposure, which comprised 1.2% of general account assets. These securities were in an unrealized loss position of $15 million at the end of the quarter. About 86% of these securities were rated AAA or AA at 9/30/07.
• None of the company's securities had any rating downgrades as of 9/30/07.
• RGA had $21 billion of general account assets and $3 billion of shareholders' equity at 9/30/07.

Scottish Re

• SCT realized $95.3 million of losses in connection with its subprime and Alt-A residential mortgage securities. The company states that it has stress-tested certain factors and expects $54.2 million of this to be a projected principal loss, but it does expect to receive full interest and principal for $41.1 million of these securities (i.e. they expect recoveries on this $41 million, but they did take a realized loss on the securities nonetheless).
• Management states that their subprime exposure resulted in a reduction in shareholders' equity, as the unrealized capital losses on subprime assets rose $300 million in the third quarter 2007.
• As of September 30, 2007, Scottish Re has subprime and Alt-A exposure to mortgage securities with a book value of $3 billion or 27% of the total investment portfolio. Subprime bonds had book value of $1.9 billion, which represents 17% of the investment portfolio. And Alt-A bonds had a book value of $1.1 billion, which represents 10%. $2.3 billion or 77% of the total subprime and Alt-A bonds are run by three of SCT's securitization vehicles Ballantyne Re, Orkney Re and Orkney Re II.
• Through 10/31/07, only 65 of SCT's 768 individual subprime securities experienced a rating downgrade. 80% of the bonds are currently rated AA- or higher and almost 98% are rated A-, A3 or higher.

StanCorp Financial Group

• SFG states that it has no direct exposure to subprime or Alt-A mortgages in its commercial mortgage loan portfolio or its fixed maturity securities portfolio at 9/30/07.

Sun Life Financial

• Sun Life does not believe it will experience any material losses as a result of its investments in asset backed securities with residential subprime and Alternative-A (Alt-A) mortgage exposure. Ninety-six per cent of these investments were either issued before 2006 or have an "AAA" rating.
• Management also stated that, as of September 30, 2007, SLF had indirect exposure to residential subprime and Alt-A mortgage-backed securities of $366 million and $191 million respectively, representing approximately 0.5% of the company's total invested assets.

Swiss Re

• Swiss Re's overall exposure to subprime bonds was CHF 377 million ($324 million) or 0.1% of general account assets at 9/30/07. Management states that the company further reduced its position to CHF 290 million ($250 million) as of November 2nd.
• Swiss Re's CFO, George Quinn, noted that the company had a relatively low subprime bond loss of CHF 12 million.
• On November 19, Swiss Re announced that its financial services unit had lost 1.2 billion Swiss francs ($1.07 billion) on two credit-default swaps that it had sold to protect clients against the loss of investments backed in part by subprime mortgages.
• Swiss Re had CHF 315 billion ($271 billion) of general account assets and $32 billion ($28 billion) of shareholders' equity at 9/30/07.

Torchmark

• Torchmark has no exposure to securities backed by subprime collateral.

Unum Group

• "The credit quality of our mortgage-backed securities portfolio has not been negatively impacted by the recent issues in the market concerning subprime mortgage loans. The change in value of our mortgage-backed securities portfolio has moved in line with that of prime agency-backed mortgage-backed securities."

XL Capital

• XL had $1.2 billion in first lien subprime exposure at 9/30/07, with an unrealized loss position of $63 million. Holdings consisted of 33% ($388 million) of 2007 and 26% ($309 million) of 2006 vintage securities. 89% of these securities were either rated AAA or AA at 9/30/07. The company also had approximately $77 million in second lien subprime exposure at 9/30/07.
• XL also had a $992 million exposure to Alt-A securities in an unrealized loss position of $19 million as of 9/30/07. 97% of these securities are rated AAA or AA at 9/30/07. These holdings consisted of 14%, 33%, and 38% of 2007, 2006, and 2005 vintage securities, respectively.
• The company had an additional $115 million exposure to ABS CDOs with subprime collateral at 9/30/07.
• XL also has indirect exposure to subprime through its 46% stake in financial guaranty company Security Capital Assurance (which it spun off a portion of earlier this year) and various reinsurance deals with Security Capital Assurance as well.

¹ For an earlier expose of such losses, please see our August 14, 2007 release entitled Subprime Mortgage Market Difficulties: Unlikely To Have Major Direct Impact on Insurer Investment Portfolios.
²The three broad categories are Held-to-Maturity, Trading or Available-For-Sale. Held-To-Maturity securities are reported at amortized cost unless a decline in value is deemed other-than-temporary, in which case the carrying value is reduced.
³FASB Statement Number 157 (September 2006)
⁴SAP accounting is a more conservative accounting standard required of all insurance companies reporting to state insurance departments.