Life insurance stocks fall as outlook darkens
NEW YORK (Reuters) - Shares of life insurers fell on Thursday, extending recent losses and sending some companies to new lows, on concerns the sector's woes would only worsen in the fourth quarter.
The Dow Jones U.S. life insurance index .DJUSIL, which is already down 70 percent year to date, fell 8.4 percent on Thursday.
There is growing concern over life insurers large exposure to commercial mortgage-backed securities, based on increasing volatility in CMBS indexes.
Bonds backed by U.S. commercial real estate loans have weakened on fears that a stalled economy could lead to a wave of defaults on properties such as office buildings, stores and hotels.
The industry has large exposure to both CMBS and commercial real estate loans through large investment portfolios.
Equity market declines are also eroding the funds that life insurers have set aside to cover costs for variable annuities, a popular retirement product that account for a large portion of the industry's sales.
Wachovia, in a research note, said it expected the sector to see "continued deterioration across a spectrum of asset classes, something which we're only in middle innings."
Its initial outlook for the fourth quarter is "worse investment and operating results emerging than seen in the third quarter," said Wachovia.
Lincoln National Corp (LNC.N) was the biggest drag on the Dow insurance index, falling 19 percent to $5.90 on the New York Stock Exchange, its lowest level in decades.
Hartford Financial Services Group Inc (HIG.N), a large life and property insurer not listed in the index, fell 12 percent to a new low of $6.04 on the NYSE.
Both Lincoln and Hartford are waiting to hear if they will receive federal funding under the government's $700 billion rescue plan.
Five-year credit default swaps on Hartford Financial were trading at about 15 percent upfront, or $1.5 million to insure $10 million of debt for five years, plus 500 basis points. MetLife Inc (MET.N) swaps were trading about 12 percent upfront.
Credit default swaps trade on an upfront basis when a company is considered distressed and sellers of protection want to be paid more at the outset of the contract due to higher perceived risk of the firm defaulting.
MetLife, the largest U.S. life insurer, was down 7 percent at $17.66 on the NYSE, after falling as low as $15.73, below a 52-week low. The shares lost 8.3 percent on Wednesday.
Late Wednesday, MetLife said it did not have exposure to two mortgages that have been reported as likely to default, and said most of its CMBS portfolio was highly rated.
The company is a large commercial real estate lender, with loans totaling about $35.9 billion outstanding and few delinquencies to date.
(Reporting by Lilla Zuill; additional reporting by Ciara Linnane; editing by Jeffrey Benkoe)
