Bank Says P-C Sector Can Weather Fannie/Freddie Exposures

Property-casualty insurance companies’ investment exposures to the financially-stressed Fannie Mae and Freddie Mac mortgage companies are large for some and manageable for most, according to Bank of America.

The bank’s equity research arm said 20 U.S. p-c companies it analyzed have a total of approximately $39 billion invested in securities issued by Fannie Mae and Freddie Mac, of which $37 billion are asset-backed or other debt securities and $2 billion are preferred stock.

It found that the Fannie/Freddie exposures for Horace Mann, W.R. Berkley, Hanover Insurance, ACE, and Selective each represent over 20 percent of their common equity.

But the analysts said those higher exposures do not automatically translate into losses. Riskier preferred stocks represented 7 percent of the common equity of W.R. Berkley, 3 percent for CNA, 2.5 percent for Hartford, 1.3 percent for Cincinnati Financial, and 0.7 percent for American International Group.

Bank of America found exposures for large-cap names are 12-to-17 percent of their common equity. It said for each of the other large-cap insurers (AIG, Allstate, Chubb, The Hartford and Travelers), Fannie Mae-issued securities represent approximately 7-to-9 percent of the companies’ common equity, while Freddie Mac-issued securities represent 5-to-9 percent.

The analysts said that in their view the p-c sector has seen intensified pricing competition across most business lines, but a generally favorable loss-cost environment is leading to continued profitable margins and return on equities.

In personal lines, the competition was found to have increased significantly, putting greater pressure on smaller companies.

Overall, the bank said that the p-c sector’s investments in securities issued by Fannie Mae and Freddie Mac will not ultimately lead to significant write-downs. However, recent pressure for the entities to raise additional capital and concerns about a failure by Fannie and Freddie may lead to spread-widening and mark-to-market losses, the bank added.

If the U.S. government were to assume the liabilities of these companies, the analysts said, one could see some positive marks.

They tabbed the asset categories most at risk as the common and preferred stock, noting that the exposure to common stock is minimal.

For some p-c companies, the amount invested in the debt securities backed by these entities is a substantial proportion of common equity, the analysts report said.