WASHINGTON--Stronger support for their mortgage-backed securities holdings makes the government's decision to place mortgage giants Fannie Mae and Freddie Mac into conservatorship a net positive to publicly held property-casualty insurers and reinsurers, according to a new report by Credit Suisse analysts.

That is so even though the prices of the companies' common and preferred stock are a shadow of their former value, according to their study.

At the same time, Credit Suisse analyst Vinay Misquith acknowledged a "concern" about the losses from steep declines in Fannie and Freddie common and preferred stock on the balance sheets of a number of publicly held p-c insurers and reinsurers.

"We believe that the takeover of Fannie and Freddie is a positive for property-casualty insurers and reinsurers as we expect the value of mortgage-backed securities guaranteed by the GSEs (government secured enterprises) as well as other mortgage-related assets to rise in value," Mr. Misquith said.

He said that Progressive and W.R. Berkley are the most exposed to the decline in value of Fannie and Freddie common stock.

Freddie common was selling at $1.10 this afternoon, and Fannie common $1.13, in a down market.

But most preferred stocks of the two mortgage giants are also suffering large hits. Most preferred stock issues for the two companies, which came at $50 face value, are selling in the $2.30 range, as compared to a 52-week high of $44 or more.

According to the report, these investments amount to 8.9 percent of Progressive's and 6.6 percent of WR Berkley's common shareholders' equity as of June 30.

Amongst smaller insurers, Erie Indemnity Co. exposure to Freddie and Fannie common and preferred represented 9.4 percent of common equity, although its total holdings were just $90.9 million

Both Berkley and Progressive may need to reduce or temporarily suspend their stock repurchase programs if the preferreds decline in value significantly, the report said.

Berkley has been repurchasing a lot of its own stock recently, and this may slow its repurchases, the report said.

It added that PGR suspended stock repurchases in the month of July in part due to volatility in the valuation of its investment portfolio, and that "a further decline in the value of Fannie and Freddie preferreds may lead them to halt stock repurchases for a further period of time."

Regarding the balance sheets of the p-c insurers and reinsurers, p-c insurers with net unrealized losses under accounting rules which are 10 percent or more of common shareholders' equity are XL Capital, Hartford Insurance Group, American Financial Group and CNA.

XL Capital's net unrealized losses under accounting rules would be $2.2 billion, or 25 percent of pro-forma second-quarter 2008 common shareholder's equity, though the $3.1 billion net capital raise was $1.67 billion higher than the charge for settlement of the reinsurance contract with SCA.

"This implies the company has a reasonable capital cushion, though a very large catastrophe loss could jeopardize the company's capital position," the report said.

Special Reports /

Analysts Say Move On Mae And Mac Good For P-C Sector

Related Stories

Recommended For You