Overview

Credit Troubles and the Reinsurance Market
The last month has been astounding. AIG, largest insurer in the world by 2007 market value, is now operating under government control. The worldwide market has recognized well over $800Bn in credit-related losses at financial firms. The five largest U.S. investment banks merged, failed or converted their charters. Overall stock indexes have fallen by as much as 25% from repeated shocks to market liquidity and confidence. The FDIC, Federal Reserve and Treasury have already extended over $300Bn of credit and liquidity support. Through the intently-watched "TARP" bailout legislation the Treasury has authority to buy a further $350Bn in distressed assets, with $350Bn more available, subject to Congress's veto. European governments have similar programs.

A number of reinsurers have taken credit charges, and we summarize these companies' results (in Appendix A). This edition of Holborn Perspectives also looks to measure the overall amount of U.S. mortgage losses, and other causes of actual and reported losses to the credit markets. We offer our opinions on what to expect in the 2009 reinsurance market.

We estimate that the amount of credit losses booked to date are greater than the amount of mortgage defaults, even under a pessimistic view. The greater danger is that the economy will continue to decline into a general recession. We also believe that the amount of losses booked to reinsurers' bond portfolios is at least as much as the losses they assumed from Hurricane Katrina.


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