Hartford, Prudential, MetLife Credit Swaps Widen to Records

By Shannon D. Harrington and Caroline Salas
October 2, 2008

Oct. 2 (Bloomberg) -- The cost to protect against default by Hartford Financial Services Group Inc., Prudential Financial Inc. and MetLife Inc. soared to records and shares fell on speculation turmoil in financial markets may be spreading to insurers.

Credit-default swap traders were demanding upfront payments to protect against a default by Hartford, Prudential and MetLife for five years. Shares of Hartford plunged 32 percent; MetLife by 15 percent; and Prudential by 11 percent on concern the companies face losses as the value of fixed-income assets plunge amid the worst financial crisis since the Great Depression.

``Insurance companies are known for buying really illiquid stuff, they're just looking for yield,'' said Michael Donelan, who manages $2 billion of bonds at Ryan Labs Inc., a money management and research firm in New York. ``There's no bid for anything right now. Nothing. They have to mark to market for quarter end, so I'm sure there was some realization that a lot of these guys may take losses.''

U.S. Senator Harry Reid may have helped push the markets into a panic after saying yesterday that a ``major'' insurer may be on the brink of failure, Donelan said.

Credit-default swaps protecting against defaults by Prudential and MetLife were quoted at a mid-price of 9.5 percentage points upfront in addition to 5 percentage points a year, according to Credit Suisse Group AG. That means it would cost $950,000 initially and $500,000 a year to protect $10 million of the companies' bonds from default for five years. Yesterday, the cost for Newark, New Jersey-based Prudential was $500,000 a year with no upfront payment and $460,000 for MetLife.

Lincoln National

The upfront cost for contracts on Hartford and Lincoln National Corp., the fourth-largest U.S. life insurer by assets, was quoted at 9 percentage points, Credit Suisse prices show.

Contracts on XL Capital Ltd., the Bermuda-based business insurer, were quoted at 9.5 percentage points upfront.

An increase in the contracts, used to hedge against losses or to speculate on creditworthiness, represents a decline in investor confidence.

``In this very skittish market everybody just piles on,'' said Jim Hannan, managing director for fixed income strategy at MTB Investment Advisors in Baltimore, which oversees $4 billion in fixed-income assets. ``They hadn't moved wider and guess what? Today's their day.''

Investors are growing concerned that the insurers are holding investments that are sinking in value or face losses after the bankruptcies of Lehman Brothers Holdings Inc. and Washington Mutual Inc.


The government seizure of American International Group Inc. last month also sparked fears that even the industry's biggest companies aren't immune from failure, said Rob Haines, an analyst at independent fixed-income research firm CreditSights Inc. in New York.

``Everyone's shell-shocked and has the mentality that if this can happen to AIG, it can happen to anybody,'' Haines said. ``It's completely not reflective of fundamentals.''

AIG, which used a subsidiary to sell credit-default swap protection on securities linked to U.S. home loans before much of the market collapsed, was seized after ratings downgrades triggered more than $13 billion in collateral calls.

``As far as I know, and I'm pretty certain, none of the other major life insurers were doing what AIG was doing,'' Haines said.

September Drop

Investment-grade corporate bonds posted their worst month since 1980 in September, losing 7.3 percent, and high-yield securities tumbled 8.3 percent, their worst performance in at least two decades, according to Merrill Lynch & Co. index data.

Hartford shares dropped $12.20 to $25.91 in New York Stock Exchange trading. Prudential fell $7.15 to $57.65 and MetLife declined $7.19 to $40.96.

Reid, in pressing for passage of a $700 billion financial system rescue plan, said that a ``major'' insurance company was about to go bankrupt if financial markets weren't calmed.

``We don't have a lot of leeway on time,'' Reid told reporters after a luncheon in Washington. ``One of the individuals in the caucus today talked about a major insurance company -- a major insurance company -- one with a name that everyone knows that's on the verge of going bankrupt. That's what this is all about.''

`Confident' in Strength

Reid's comments were ``meant to refer to the conditions in the financial sector generally,'' spokesman Jim Manley said today in a written statement. ``He has no special knowledge about nor has he talked to any insurance company officials.''

The Nevada Democrat ``regrets any confusion his comments may have caused,'' Manley said.

A Hartford spokeswoman, Shannon Lapierre, reiterated comments the company made yesterday in a statement. The company said it's ``confident'' in its financial strength and its ability to meet commitments to customers and is ``living through a period of unprecedented market conditions.''

Hartford's gross unrealized losses rose by $964 million in July, led by declines in the value of financial services holdings including $258 million from stock investments and $239 million from fixed income. Investments in Fannie Mae and Freddie Mac preferred stock accounted for about $135 million of the unrealized losses in July.

CDX North America

MetLife's realized investment losses after taxes rose 21 percent in the second quarter from the year-earlier period to $233 million, and included $175 million in credit-related writedowns. Unrealized losses on fixed-income securities rose by almost $1 billion to $9.74 billion in the three months ended June 30, while unrealized gains on debt holdings fell to $6.16 billion from $8.62 billion.

``MetLife is fully able to meet all its obligations,'' the New York-based insurer said today in a statement distributed by Business Wire.

Prudential's Bob DeFillippo declined to comment.

Broader gauges of corporate credit risk also rose today. A new version of the Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the U.S. and Canada, rose 5 basis points to 165 in its first day of trading in New York, according to broker Phoenix Partners Group.

In London, the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 4.5 basis points to 124, JPMorgan Chase & Co. prices show.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Copyright © 2008 FBIC (www.badfaithinsurance.org)

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