Copyright 2008 SourceMedia, Inc.All Rights Reserved National Mortgage News
October 13, 2008
Pg. 9 Vol. 33 No. 4
711 words
Fitch: Mortgage Holdings Could Imperil Life Insurance Firms
Brad Finkelstein
CHICAGO-Fitch Ratings here has downgraded its outlook on the life insurance industry to "negative" from "stable" in large part because of their mortgage and mortgage-related investments.
"The dramatic downturn in the U.S. housing market, which has led to significant losses to mortgage-related investments, has prompted a financial crisis among major U.S. financial institutions, market illiquidity, and a wholesale repricing of credit risk. While less exposed to these market issues than many investment banks, commercial banks, or financial guarantors, life insurers are experiencing a significant deterioration in investment results, which has negatively impacted industry earnings and capital," the report from Fitch said.
Life insurers who are most likely to see downward ratings pressure in the next 12 to 18 months include firms with above-average exposure to mortgage-related investments.
On the other hand, Fitch said life companies are "relatively well-positioned to weather an environment of capital markets volatility and market illiquidity."
Furthermore, the rating agency said "a vast majority of life insurers avoided investments in collateralized debt obligations backed by residential mortgage-backed securities, and most have little or no activity in the credit default swap market."
Meanwhile more firms are disclosing their investments in one of the many companies impacted in recent weeks by the financial crisis. Both Standard & Poor's and Moody's downgraded Primus Guaranty Ltd., Hamilton, Bermuda.
"Unprecedented credit market volatility and the resulting failure of such firms as Fannie Mae, Freddie Mac, Lehman Brothers and Washington Mutual have clearly impacted Primus Financial," said Thomas W. Jasper, chief executive of Primus Guaranty. "However, at the end of September, Primus Financial had $820 million in long-term debt and equity capital to meet commitments under its credit default swaps contracts. Additionally, $75 million of capital is held at Primus Guaranty."
The company has $16.1 million in credit default swaps exposure to Washington Mutual. It has $80 million in CDS exposure to Lehman Brothers and $215 million in CDS exposure to Fannie Mae and Freddie Mac.
Swedbank, Stockholm, has a secured exposure to Lehman Brothers of $1.35 million. But it is not taking any provisions because the underlying commercial mortgage loans are performing and the collateral is of good quality, the company said.
Aegon, The Hague, The Netherlands, has total general account fixed-income exposure to Washington Mutual of 125 million euros ($170.2 million) during this year. The company said it reduced its exposure to WaMu by 47%.
A.M. Best Co., Oldwick, N.J., has downgraded the financial strength rating of Shenandoah Life Insurance Co., Roanoke, Va., to B++ from A-.
It said the downgrade is because of the "significant exposure Shenandoah Life has to Freddie Mac and Fannie Mae perpetual preferred stock and the expected reduction in the company's capital and surplus reflecting anticipated writedowns based on current low valuations. Furthermore, A.M. Best notes that Shenandoah Life continues to maintain a relatively high exposure to commercial mortgages, collateralized debt obligations, other structured securities and borrowing under the Federal Home Loan Bank program."
FPIC Insurance Group Inc., Jacksonville, Fla., had exposure of $4.1 million to Lehman Brothers ($2.5 million senior debt, $1.1 million subordinated notes and $500,000 in preferred stock); $2.1 million of senior debt of American General, a subsidiary of American International Group; $300,000 in Fannie Mae preferred stock; $2.1 million in WaMu senior debt; and $2.5 million in Morgan Stanley senior debt.
Zenith National Insurance Corp., Woodland Hills, Calif., said it had $100.7 million in investments (based on their fair value) in a number of companies, including AIG (both fixed income and equity), plus fixed-income investments in Citigroup, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley and Wachovia. The decrease in the value of these assets between June 30 and Sept. 19 was $24.3 million.
Axis Capital Holdings Ltd., Pembroke, Bermuda, said it expects to realize a loss of $60 million associated with Fannie Mae and Freddie Mac preferred equity.
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