Several Insurers Could See Big Fannie, Freddie Losses

By | August 25, 2008

A handful of insurers holding equity in U.S. home-funding giants Fannie Mae and Freddie Mac could see big losses if a federal takeover wipes out the value of the agencies’ common and preferred stock, as some investors fear.

“There are a handful (of insurers) that have pretty decent exposure” to Fannie and Freddie equity, said Ed Keane, a senior financial analyst with Oldwick, New Jersey-based ratings agency A.M. Best Co Inc.

To be sure, figures compiled by A.M. Best show that, by and large, U.S. insurers are more heavily invested in debt issued by the mortgage giants and could benefit from a government helping hand.

But for equity holders the picture is not as rosy. While it is far from clear how a government bailout could be structured, or when it would come, analysts say it could prove thorny for common and preferred stockholders because federal authorities would likely give debt holders seniority.

Such concerns have since the beginning of the month more than halved the value of Fannie and Freddie shares, which are down about 90 percent since the beginning of the year.

Among the insurers that own significant Fannie and Freddie- issued equity are life insurers Hartford Financial Services Group Inc. and Genworth Financial Inc, according to a research note by Fox-Pitt Kelton analyst Mark Finkelstein Thursday. Allstate Corp, the largest publicly traded U.S. home insurer, is another.

DEBT SENIORITY
Fannie and Freddie, government-sponsored enterprises (GSE) that own or guarantee almost half of all outstanding U.S. mortgages, count on debt markets to help them keep buying mortgages. Their ability to do so is crucial to helping stabilize the worst U.S. housing market since the Great Depression.

As such, if the government moves to shore up capital, it could benefit bondholders, since debt markets are a crucial source of funding for Fannie and Freddie.

Keane, an author of a recent A.M. Best report on the holdings of GSE securities by insurers, said the sector had poured close to $370 billion into fixed-income securities as of the end of 2007.

Insurers own a much smaller percentage of Fannie and Freddie equity — about $4 billion in all, but that could still prove an issue for some since the holdings appear to be more concentrated.

Catherine Seifert, an equities analyst with Standard & Poor’s, said that, for most insurers, losses from Fannie and Freddie are expected to be “manageable.”

But she added: “We are probably going to see some outsize exposure company to company.”

FKP’s Finkelstein said Hartford’s stake was about $500 million, or 2.9 percent of equity on a pre-tax basis. Genworth was a smaller 1 percent, according to the research note.

Neither Hartford or Genworth returned calls seeking comment. The shares of both fell Thursday, with Hartford losing 2.24 percent to close at $59.78, while Genworth fell 1.67 percent to $14.72.

Allstate is another insurer that had bought agency equity worth about $128 million at the end of June, according to a quarterly regulatory filing. Allstate shares lost 27 cents to close at $45.05.

(Editing by Andre Grenon)

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