Bloomberg News

Travelers Increases Subprime Bet After Market ‘Disruption’

October 19, 2011

(Updates share gain in last paragraph.)

Oct. 19 (Bloomberg) -- Travelers Cos., the insurer that remained profitable through the 2008 credit crisis, is increasing bets on subprime and alternative-documentation mortgages after securities backed by the assets fell in value.

Travelers bought $62 million of bonds tied to such loans in the third quarter, its biggest addition of the assets since 2007, according to company filings. That compares with $36 million in the first six months of the year and $31 million in all of 2010. The insurer said the purchases reflected its plan of seeking “risk-reward balance” in its $73 billion portfolio.

“The disruption in secondary investment markets for mortgage-backed securities provided the company with the opportunity to selectively acquire additional such securities at discounted prices,” the New York-based insurer said in a regulatory filing today.

Investors shunned riskier bonds in the quarter as Standard & Poor’s downgraded the U.S., and Europe grappled with a debt crisis. Defaults on subprime mortgages soared to records after banks used lax underwriting and sometimes false information to make loans to people with the riskiest credit records during the housing boom.

Estimated prices for certain subprime-mortgage securities rated AAA when issued in 2007 fell more than 8 percent to about 31 cents on the dollar last quarter, while some similar bonds backed by adjustable-rate Alt-A mortgages fell more than 7 percent to about 46 cents, JPMorgan Chase & Co. data show.

‘Risk-Reward Balance’

The overall fair value of Travelers’ investments in the securities backed by subprime and alternative-documentation mortgages was $340 million as of Sept. 30, compared with $297 million at the end of 2010. The average credit rating on the securities was Baa1, three levels above junk.

“Relative to the $2.7 billion of securities we purchased in the quarter and our portfolio of more than $73 billion, this is insignificant and consistent with our strategy of seeking investments with an appropriate risk-reward balance in all of our asset classes,” Travelers said in an e-mailed statement. “There is no change in strategy or tactics here.”

Travelers held $39.3 billion in state and municipal bonds and more than $16 billion in corporate debt as of Sept. 30. Those types of bonds outperformed mortgage securities in the credit crisis, helping Travelers remain profitable in 2008 and 2009 while rival American International Group Inc. needed a bailout after losses on subprime bonds.

Travelers’ net investment income fell to $561 million in the third quarter from $597 million a year earlier, as the company reinvested cash from maturing bonds in lower-yielding assets. The Federal Reserve has said it may keep interest rates near zero until mid-2013, pressuring investors’ returns.

Yield Curve

“The biggest issue for all insurers is the yield curve is flattened and rates are very, very low and they look like they’re going to be low for some time,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP, in a phone interview.

Travelers rallied $2.93, or 5.7 percent, to $54.39, the biggest gain in the Dow Jones Industrial Average, after reporting an increase in third-quarter policy sales and saying that it was raising prices for clients.

--With assistance from Jody Shenn and Maryellen Tighe in New York. Editors: Dan Kraut, Dan Reichl

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


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