US insurer debt protection costs fall on aid hopes

By Ciara Linnane

NEW YORK, Oct 27 (Reuters) - The cost of insuring debt issued by U.S. insurers against potential default fell sharply Monday on hopes the government will extend its rescue plan for banks to the insurance sector.

But while the debt market, via credit default swaps, showed greater confidence in the financial prospects of U.S. insurers, the stocks of the same companies extended their slide on Monday, with the shares of several industry leaders tumbling.

Media reports late last week said the government was mulling taking equity stakes in big insurers.

On Monday morning, before the market open, David Nason, Treasury Assistant Secretary for Financial Institutions, in an interview with CNBC television declined to rule out capital injections for insurers and other companies.

He added, however, that there were significant questions about how such investments would work and whether they were needed for financial stability.

In the credit markets, five-year credit default swaps on debt of home insurer Allstate Corp (ALL.N) fell about 70 basis points to 192 basis points, or $192,000 annually to insure $10 million of debt for five years, according to Markit Intraday. That was down from 262 basis points late Friday.

Five-year credit default swaps on MetLife (MET.N) fell to 455 basis points from 553 basis points, while five-year credit default swaps on Hartford Financial (HIG.N) tightened to 515 basis points from 562 basis points, according to Markit.

Five-year credit default swaps on Chubb Corp (CB.N) fell to about 90 basis points from 103 basis points.

The credit market on Monday outperformed the shares of major insurers, which extended their decline.

Allstate shares were last down 3.1 percent at $24.74, Hartford shares shed 2.5 percent to $23.78 and MetLife shares were down 3.5 percent at $28.76.

In Europe, Dutch insurer Aegon (AEGN.AS) said it is considering tapping government funds to shore up its capital. (Editing by Walker Simon)