Aviva, Swiss Life Decline in Europe on Bond Concern (Update1)
February 08, 2010, 12:07 PM EST(Adds closing share prices in third paragraph, fund manager’s comment in sixth.)
By Carolyn Bandel
Feb. 8 (Bloomberg) -- Aviva Plc, Legal & General Group Plc and Swiss Life Holding AG led declines in European insurers amid concern holdings of corporate and government debt may threaten the companies’ capital as state finances worsen.
“There is fear and loathing of the insurance sector” because of its exposure to credit-related issues, said Marcus Barnard, a London-based analyst at Oriel Securities Ltd. Life insurers are particularly affected because “they hold lots of bonds and government bonds,” he said. “It’s about capital adequacy.”
Aviva, the U.K.’s second-biggest insurer, and Legal & General, the largest investor in the U.K. stock market, dropped for a third day in London trading. The stocks slid 2.6 percent to 355.7 pence and 3.5 percent to 71.05 pence, respectively. Swiss Life, Switzerland’s biggest life insurer, lost 3 percent to 128.3 Swiss francs in Zurich.
Optimism over the economic recovery that made January the best start to a year since 2001 for the corporate bond market is fading as finances in Greece, Spain and Portugal deteriorate, while Japan struggles to emerge from recession.
Portugal and Spain today led a surge in the cost of insuring against losses on sovereign debt amid mounting concern European governments will struggle to impose spending cuts to reduce budget deficits. Credit-default swaps on Spain rose 4.5 basis points to a record 171, while swaps on Portugal climbed 15 basis points to an all-time high of 242, CMA DataVision prices show. A basis point is 0.01 percentage point.
‘Big Pressure’
“Insurers’ earnings are derived from financial markets,” said Greg Bennett, who helps oversee about 1 billion pounds of assets at Marlborough Fund Managers Ltd. “Financial markets are coming under big pressure, therefore the share prices of these companies, which are big owners of financial products, are coming under pressure.”
The 29-member Bloomberg Europe 500 Insurance Index dropped as much as 2 percent today. The measure closed down 0.3 percent at 85.07, reaching the lowest level since September and bringing the decline in 2010 to 7.2 percent.
Standard & Poor’s last year began a “stress analysis” of life and health insurers’ corporate-bond portfolios, stating they can suffer greater degrees of credit deterioration.
“If asset values go down it threatens their capital ratio, so insurers have to put more money up,” Oriel’s Barnard said. “Investors worry they’ll go bust or need a rights issue to restore their balance sheet.”
--With assistance from Kevin Crowley in London. Editors: Christiane Lenzner, Steve Bailey
To contact the reporter on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net
To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net
