RPT-Speculation of default by life insurers overdone-CreditSight

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NEW YORK Oct 20 (Reuters) - Speculation that U.S. life insurers are at risk of defaulting on their debt is overdone as companies have sufficient liquidity to cope with current market conditions, research firm CreditSights said Monday.

Since the government bailout of American International Group (AIG.N) and the collapse of Lehman Brothers (LEHMQ.PK), investors have speculated that the life insurance sector will be the next to melt down, sending credit spreads on companies such as Prudential Financial (PRU.N), MetLife (MET.N) and Hartford Financial (HIG.N) to panic levels.

"While there is no doubt that the life insurance sector is facing a period of unprecedented negative trends, we would strongly argue that the risk of default for the high quality names in the sector is extremely remote and that they are well positioned to weather current conditions," CreditSights analyst Rob Haines said in a note.

CreditSights is sticking with its negative outlook on the sector and expects to see some downgrades but believes that, "current market prices are not reflective of fundamentals.

"While we believe that mounting credit losses will result in significant losses over the next few quarters, which will require capital to be raised, we do not believe the sector is facing a near-term liquidity squeeze," said Haines.

The selloff in life insurance securities in the year so far is overdone, he said. MetLife shares have lost 49 percent of their value, Prudential shares are down 55 percent and Hartford Financial shares have tumbled 67 percent.

On the credit side, MetLife credit default swaps (CDS) have widened by 647 basis points, Prudential CDS have widened by 747 basis points and Hartford Financial CDS have widened by 658 basis points, according to CMA DataVision.

Yet the life insurance sector is not going to see a repeat of AIG, which was hit by collateral calls following rating downgrades tied to losses at its AIG Financial Products unit, said Haines.

AIG had been writing protection on collateralized debt obligations (CDOs) that were being hit by large mark-to-market losses. The collateral calls led to a liquidity squeeze at the holding company level, which eventually led to the need for the bailout.

None of the life insurance companies in CreditSights coverage universe are engaging in similar operations. Nor do they have a securities lending program of the magnitude of AIG's, which is also now creating liquidity issues for the company.

"The funding profile of the life insurance sector is stable and a run on the bank scenario is highly unlikely," said Haines.

Still, life insurers are facing material hits to their investment portfolios in the third quarter. Most of the major companies have already disclosed their exposures to securities issued by AIG, Lehman and other troubled companies such as Washington Mutual and Fannie Mae and Freddie Mac.

But the sector continues to enjoy ample liquidity and debt maturity schedules are favorable to liquidity risk profiles.

MetLife, for example, had $1.75 billion of liquid assets as of the end of the third quarter and expects that number to increase by year end.

Five-year CDS on MetLife were last trading at 691.87 basis points, or $691,870 annually to insure $10 million of debt for five years, slightly wider than 691.25 basis points late Friday, according to Markit Intraday. (Reporting by Ciara Linnane; Editing by Theodore d'Afflisio)