Insurers smacked by AIG fallout

But Burnes says major local firms avoid big trouble

Investors wait outside the Singapore office of American International Group subsidiary AIA yesterday in bid to redeem their insurance policies. (Vivek Prakash/Reuters)

Shares in two Canadian insurers with big Boston operations took a pounding yesterday over the companies' holdings in American International Group Inc. and other troubled securities that are at the center of the financial industry's credit crisis.

Manulife Financial Corp., which owns the John Hancock insurance firm and bases its US operations in Boston, fell 6 percent to $31.56, after falling 3 percent the day before. The Toronto insurer disclosed Tuesday night it would take a charge in the third quarter stemming from holdings including around $290 million in AIG bonds and other instruments and $395 million in Lehman Brothers Holdings Inc.

Also, Sun Life Financial Inc., which has big operations in Wellesley, fell 9 percent to $33.43, its lowest in four years, after the company disclosed it has $315 million in holdings in AIG. Sun Life also had $334 million of bonds in Lehman, which filed for bankruptcy at the beginning of the week, and expects to take a charge related to those securities.

Meanwhile, Massachusetts Insurance Commissioner Nonnie S. Burnes yesterday said she does not believe any major local insurers own enough of AIG or other troubled companies to be in financial trouble themselves. About one-third of Massachusetts insurers held securities of Lehman.

Her agency didn't provide figures yesterday to show the current risks in the portfolios of the companies it regulates. But Burnes said AIG's insurance subsidiaries, which include Lexington Insurance Co. of Boston, will be able to pay claims. She said it's too soon to tell if any insurers would have to raise rates if they have losses related to the current troubles, or whether they would simply absorb losses. In all, AIG sells policies through 661 insurance agents in Massachusetts.

Both Manulife and Sun Life stressed that each of their now-distressed holdings represent less than 1 percent of their respective investment portfolios.

"While these developments are extremely disappointing, to date we have avoided the worst problems in the credit markets," said Manulife chief investment officer Donald Guloien in a statement.

Another big local insurer, Massachusetts Mutual Life Insurance Co. of Springfield, yesterday said it would take a charge of $700,000 tied to its Lehman holdings, an amount spokesman Mark Cybulski described as immaterial considering the company's $82 billion portfolio.

At Liberty Mutual, spokesman John Cusolito said the Boston insurer does not have any "material" exposure to AIG or other problem investments. Liberty Mutual still intends to pay for its pending $6.2 billion acquisition of Seattle's Safeco Corp. in cash. Both Liberty Mutual and MassMutual are owned by their policyholders.

Cusolito said Liberty Mutual does own about $125 million of derivative investments backed by subprime mortgages. As with the other insurers, Cusolito said this exposure is just a tiny fraction of Liberty's overall investment portfolio of $51.1 billion.

Insurance companies are major players in financial markets and were big buyers of the kind of securities that were the initial cause of the meltdown in the nation's credit market, such as mortgage-backed securities.

Data from research firm Thomson Reuters show that Massachusetts insurers as of June 30 owned a combined $21.8 billion of mortgage-backed securities, collateralized debt obligations, and obligations issued by home lenders Freddie Mac and Fannie Mae, which were taken into conservatorship by the US government last week. The largest holders are Liberty Mutual, with $7.3 billion, and John Hancock, with $7 billion.

Companies in Connecticut, one of the nation's insurance capitals, collectively owned $32 billion of these securities, with units of The Hartford and Cigna among the largest holders.

However, these holdings don't necessarily mean the insurance companies are facing major losses, if any at all, cautioned analysts for Thomson and Moody's Investors Service. For one, these holdings include investment grade securities that have retained their value, and secondly, the government's takeover of Fannie and Freddie provides backing for their bonds.

Ross Kerber can be reached at kerber@globe.com.