Wednesday, November 19, 2008

Under Pressure: Insurance Stocks and Commercial Mortgage Backed Securities

While banks have received much of the attention among financial stocks, life insurers have come under particular pressure of late. The insurance index ($KIX; top chart) reached a new bear market low on Monday, thanks to unusually weak performance by MET, PRU, and others.

Meanwhile, concerns over defaults in the commercial mortgage space led to a widening of spreads for even the most creditworthy tranches of commercial mortgage backed securities (CMBS; bottom chart). Many insurers are highly exposed to the commercial real estate market; those default fears mean that insurers are moving opposite in price to those CMBS spreads. Indeed, we've even seen a tripling in the cost of default insurance for blue chip insurer Berkshire Hathaway in the past two months. Should commercial real estate markets continue to crumble, we could see further price pressure on the insurers--and yet more calls for rescue funds from the government.