Credit Markets Update: Insurer protection remains under pressure

The cost of protection on insurance companies remained under pressure in the credit derivatives market this week, with spreads widening across the sector as the fall in equity values caused investor concern about insurers being forced to sell equities to maintain their capital adequacies.

Otherwise, there was thin trading for credit default swaps in Europe.Profit warnings from Dutch insurer Aegon on Monday and Belgium's Fortis on Tuesday added to fears of extended damage from the equity markets for insurers. And Moody’s put Munich Re on review for possible downgrade yesterday. Five-year credit default swaps widened by 10 basis points across the sector, and new highs were traded in credit protection for Allianz (75bp) Axa (175bp) and Munich Re (70bp).

“We are seeing a fair amount of activity here, with bids for insurance protection notching up, but if we don’t see a recovery soon, spreads could continue to rise, and that liquidity could dissolve,” said one credit derivatives trader in London today.

News that US telecoms group WorldCom filed for bankruptcy added to investors' nerves in Europe. But the credit derivatives market continued to see thin volumes. “There’s a lot of turbulence, and a lot of participants are stepping out of the market amid the chaos,” said another trader in London today.

Volatility was still a feature in some names as the market continued to react to negative rumours. Five-year credit default swaps for advertising and communications group WPP opened 40bp wider on Monday to 240bp-mid, after a UK national weekend newspaper accused it of ‘bending the rules’ when stating its profits. On Monday, the firm denied the reports, and credit protection slowly narrowed, trading today at 195/230bp.

Five-year credit protection on Vivendi Environnement widened by 20bp to 185bp-mid on Monday, as it was lowered to Baa1 by Moody’s and kept on negative watch. Over the week, it has widened a further 5bp, trading at 175/205bp today.