Allianz, Allstate units vulnerable defaults

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HEADLINE: Allianz, Allstate Units Vulnerable to Defaults

BYLINE: Melissa Gannon, Director of Insurance and Bank Ratings.

Melissa Gannon is director of insurance and bank ratings for TheStreet.com Ratings, formerly Weiss Ratings, where she directs the operations of the company's insurance and bank ratings division.

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Life insurance units at Allianz(AZ:NYSE), Allstate(ALL:NYSE) and Manulife Financial(MFC:NYSE) held more risky mortgage assets than capital and reserves at the end of 2008, making them more vulnerable to loan defaults.

The credit quality of commercial mortgage-backed securities will likely decline this year as defaults rise and the real estate market deteriorates, a new report from Fitch Ratings says. The investment portfolios of the nation's largest life insurance companies might suffer as a result.

The life insurance industry has $214 billion in commercial mortgage-backed securities, according to new data from SNL Financial, which tracks the portfolios of more than 800 life insurers. More than a third of that amount, or $86 billion, is invested in bonds rated A or less. The issuers of lower-rated bonds are more likely to default, Fitch says.

Fifteen of the top 20 life insurers had more commercial mortgage-backed securities than capital and reserves. Five of those companies held more of the riskier bonds, the ones rated A or less. They were Allianz Life Insurance; Allstate Life Insurance; Manulife's John Hancock Life Insurance; Genworth Life Insurance, part of Genworth Financial(GNW:NYSE); and Hartford Life Insurance, a unit of Hartford Financial Services(HIG:NYSE).

Allianz Life Insurance, which holds three times more of the lower-rated securities than capital and reserves, might be the most vulnerable. The company had $2.1 billion of capital and reserves and $6.9 billion of the less-desirable issues at year end.

Prudential Insurance Company of America, the largest insurance unit of Prudential Financial(PRU:NYSE), is the largest holder of commercial mortgage-backed securities with $11.7 billion but almost all of that amount is invested in AA-rated or AAA-rated bonds.

The table below shows the life insurers with the largest holdings of commercial mortgage-backed securities. It compares those holdings to capital and reserves reflecting the amount of capital potentially at risk from increased impairments, or lost value from bond defaults.

TABLE 1
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