Insurer CDS jump wider on investment loss fears

Lower-ranking financial credit spreads jumped to record wides on Thursday, led by insurers, on concerns about losses on investment portfolios after British life insurer Aviva took a hit from bond defaults. Late on Thursday, the Markit iTraxx five-year senior financials index was at about 187.5 basis points, 25.5 basis points wider on the day, while the subordinated index was 47 basis points wider at 345 basis points, a trader said.
The subordinated index hit a record wide of 360 basis points earlier in the session, IFR reported. "Insurers are the big losers. Aviva is the main reason," the trader said. Five-year senior credit default swaps on Aviva were about 95 basis points wider at 385 basis points, while its subordinated CDS was 180 basis points wider at 670 basis points, Markit data showed. Avivas shares were down more than 30 percent.
The company reported a 2008 operating profit of 2.297 billion pounds ($3.25 billion), broadly in line with forecasts, but it took a 140 million pound hit from corporate bond defaults. Aviva said it was setting aside a further 550 million pounds to cover defaults against its corporate bond and mortgage portfolio, bringing the total provision to 1.13 billion pounds.
"Avivas share price and bond spreads have collapsed after results that on the face of it were bad but not that bad," RBS credit analysts wrote in a note, adding that it made no sense for Aviva 5-year subordinated CDS to be trading wider than Aegon. Aegon subordinated CDS is at 576 basis points, about 100 basis points wider on the day and its senior CDS 90 basis points wider at 521 basis points.
Prudential was another big mover. Its senior and subordinated CDS both widened by about 200 basis points to 925 and 970 basis points respectively, Markit prices showed. In the broader credit derivatives market, the investment-grade Markit iTraxx Europe index was at 201 basis points, 9 basis points wider versus late on Wednesday. The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 1,136.5 basis points, 24.5 basis points wider.