US CREDIT-Insurers escape death spiral, further gains limited

By Karen Brettell

NEW YORK, Nov 2 (Reuters) - U.S. insurers, including
Genworth Financial Inc (GNW.N) and Lincoln National Corp
(LNC.N) have improved capital levels and are facing lower loss
expectations, analysts said on Monday, removing the risk faced
six months ago that some could be pushed into a liquidity death
spiral.

However, further improvement to their debt and credit
default swaps, which in some cases have rallied almost ten-fold
in the past year, is likely to be muted as the companies still
face losses from risky assets.

"The capital concerns for the companies have been largely
alleviated ... and its all attributable basically to the
rebound in the markets," said Rob Haines, analyst at research
firm CreditSights.

"Genworth in particular was close to entering what could be
deemed to be a death spiral, and they were bailed out by the
markets," he said. "Everybody's being lifted, it's a world of
difference than it was six months ago."

Surging U.S. stock markets and falling debt yields have
allowed insurers to raise new funds in the capital markets,
which had closed to them in the midst of the credit crisis.

Lincoln and Hartford Financial Service Group Inc (HIG.N)
benefited from funds coming from the government's Troubled
Asset Relief Program, in addition to raising capital through
stock and debt issuances.

Genworth, which was refused access to the TARP program,
successfully sold $500 million in shares in September and
raised more than $700 million in an IPO of its Canadian
mortgage insurance business.

Improving market and economic conditions has also reduced
the amount of losses the companies are expected to take in
their investment portfolios.

For example, unrealized losses at MetLife's fixed-income
investment portfolio has fallen to $1.4 billion, from $14
billion in the second quarter and $23 billion in the first
quarter.

MetLife has large exposure to risky real estate assets,
though the company in general is considered among the safest
names in the sector.

"Rising equity markets and tightening credit spreads have
had a massively salutary impact on the book values of these
companies and have given them a much higher level of
flexibility to reposition their investment portfolios," said
David Havens, managing director in credit trading at Hexagon
Securities.

Now, he said, "the potential failure is quite unlikely, so
people are focusing on how they are going to maintain their
franchises and build the businesses."

The extreme improvement in insurers' credit spreads,
however, likely leaves little room for further improvement.

Credit default swaps protecting the debt of Genworth, for
example, have rallied to around 450 basis points, or $450,000
per year for five years to insure $10 million in debt, from
over 4,000 basis points in December, according to Markit.

Lincoln's debt protection costs have fallen to around 240
basis points from a wide of almost 3,000 basis points in April,
Markit data show.

And the risk of investment losses, though lessened,
remains.

"There's going to be impairment to the credit portfolios,"
said Havens. "They are going to be in for quite a challenge
over the next couple of years, but they would appear at this
stage to have capital to deal with that."

CreditSights' Haines said he is considering changing his
recommendation on the industry from underweight to reflect
their better capital positions, but does not plan to go
overweight the sector.

"I don't see a significant upside," he said. Haines is,
however, overweight MetLife's debt, which he says is good value
especially for buy and hold investors due to the company's
leading position in the industry.