US CREDIT-Insurers escape death spiral, further gains limited

By Karen Brettell NEW YORK, Nov 2 (Reuters) - U.S. insurers, including Genworth Financial Inc and Lincoln National Corp 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 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. ((Reporting by Karen Brettell, Editing by Gary Crosse)) For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol: U.S. corporate bond price quotations... U.S. credit default swap column........ U.S. credit default swap news.......... European corporate bond market report.. European corporate bond market report.. Credit default swap guide.............. Fixed income guide..................... U.S. swap spreads report............... U.S. Treasury market report............ U.S.

Treasury outlook.................. U.S. municipal bond market report......

Keywords: MARKETS CREDIT/ ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.