Insurers' Corporate-Bond Losses May Exceed Subprime (Update1)

By Andrew Frye
Bloomberg News
February 3, 2009

Feb. 3 (Bloomberg) -- Corporate debt defaults may cost U.S. life insurers "substantially" more than losses on securities linked to subprime, Alt-A and commercial mortgages, said Eric Berg, an analyst at Barclays Plc.

Corporate defaults are poised for a "significant" increase this year as the recession deepens, Berg, based in New York, said in a research note yesterday. The American Council of Life Insurers estimated the industry, led by MetLife Inc. and Prudential Financial Inc., holds $1 trillion in corporate debt.

"None of the life insurers we studied appear to be doing a particularly good job" of picking bonds backed by companies, Berg said. "Understandably, investors are concerned."

Life insurers have plummeted in the last year in New York trading as investment losses and guarantees on slumping retirement products sap capital. Hartford Financial Services Group Inc. leads the industry with $7.9 billion in writedowns and unrealized losses tied to the real estate market since 2007, while New York-based MetLife has accumulated $7.2 billion, according to Bloomberg data.

Hartford and Prudential have cut jobs, asked regulators to ease reserve standards and applied for aid from the government's $700 billion rescue program to replenish funds after reporting net losses in the third quarter. MetLife sold $2.3 billion of stock in October to bolster finances. The Standard & Poor's Supercomposite Life & Health Insurance Index has declined about 60 percent in the last 12 months.

‘Deep Recession'

MetLife Chief Investment Officer Steven Kandarian, who oversees the insurer's portfolio of more than $300 billion, said he prepared for "a long and deep recession" by cutting investments in airline, carmaker and homebuilder bonds. Kandarian predicted in June that more companies would default on their debt as the economy slows.

MetLife, the best performing stock of the seven surveyed by Berg, declined by about half in the last 12 months, while Aflac Inc. is down 62 percent and Newark, New Jersey-based Prudential slipped 69 percent. Lincoln National Corp. fell 71 percent and Principal Financial Group Inc. retreated 72 percent. Hartford, named for the Connecticut city where it's based, declined 81 percent and Genworth Financial Inc. dropped 90 percent.

Aflac, based in Columbus Georgia, said yesterday that fourth-quarter profit slipped 48 percent on investment losses, including writedowns of holdings in Icelandic banks. The Columbus, Georgia-based insurer was downgraded by A.M. Best Co. yesterday as the ratings firm cited Aflac's concentration of investments in financial firms.

FBL, Allstate

FBL Financial Group Inc., the West Des Moines, Iowa-based seller of fixed-indexed annuities, said yesterday it had a fourth-quarter investment loss tied to holdings of General Motors Corp., Ford Motor Co., Circuit City Stores Inc. and Iceland's Kaupthing Bank hf.

Allstate Corp., the largest publicly traded U.S. home and auto insurer, is cutting 1,000 jobs after investment losses at its life unit caused the company's first unprofitable year since its initial share sale.

Book value per share, a measure of Allstate's assets minus liabilities, fell 25 percent in three months ended Dec. 31 to $23.51 because of a quarterly loss and a $4.7 billion decline in the value of securities the Northbrook, Illinois-based insurer doesn't intend to sell. The drop includes about $1.6 billion on corporate debt, $1.2 billion on commercial mortgage-backed securities and about $900 million on asset-backed securities.

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