ferrit       

AIG is heavily exposed to the U.S. residential mortgage market:

The above issues will continue to ensure there is a dark cloud over earnings for the next few years. In addition, AIG has already taken significant hits on the CDSs (insurance) it has written on some $63bn of subprime CDOs. However, there are much graver thunderstorms on the horizon.

FirstFed is a business model in serious trouble. Its loan origination volume has decreased significantly over the last 9 months and will sone be non-existent. This is caused by the weak real estate market in California and borrowers preference for fixed rate loans which FirstFed is unable to provide. This is clearly illustrated by the shrinkage in Total Assets since June 30, 2006 .

Allstate has BV equity of around $22bn vs a higher market cap of around $28bn.

 

This equity is geared to support $159bn of assets of which $121bn are investments and excluding short term assets, investments total around $115bn.

 

Although Allstate had a conservative investment portfolio recent events plus the recent downgrade of the monolines means significant writedowns in investment values can be expected. Below is tabled the writedowns forecast assuming a number of the AAA wrapped munis are downgraded, corporates are downgraded to reflect the increasing defaults (back to the historical mean), ABS,CMBS and RMBS reflect current conditions plus the impact of monoline downgrades and global equities experience a drop in value.

 

Expect to see the share price drop to $35 over the next few months to reflect future writedowns.

PNC faces significant challenges from its low capitalisation and its poor quality asset portfolio.

Total asset backed securities of $28bn comprising: RMBS $20.7bn (either US govt agency issued or rated AAA), CMBS $4.9bn and other ABS $2.4bn.

The loan portfolio totals HELOCs $14.1bn and home mortgages of $1.8bn of which 61% are second lien.

PNC provides off-balance sheet liquidity commitments to Market Street of $7.8 billion and other credit enhancements of $0.7 billion.  With a CP market once again illiquid, these assets will now be migrating to PNC’s balance sheet and the credit risks will now be sheeted home to PNC. The assets of Market Street consist primarily of automobile loans, purchased receivables, and credit card loans. At least this is not sub-prime mortgages.

Based on this situation, PNC’s present total assets of $131bn will increase $8.5bn to almost $140bn. The book equity of $14.5bn will be significantly reduced post writedowns of its assets by around $6.8bn (based on market assumptions). This will decrease BV equity to around $8bn. Tier 1 capital is now only 7.5% and this writedown will drop below the regulatory minimum of 4%.

Expect share price to drop over next 6 months to around $25 to $35.

APOLOGIES FOR THE INCORRECT HEADING ! It should read,

XL will be buried by its counterparty exposure to SCA

The two principal risks which will bury XL relate to its relationship with SCA.   

XL cannot wash its hands of SCA by the IPO. SCA is ‘managed’ by XL and is inextricably linked via various agreements. As a result XK is the major creditor to SCA and has the greatest counterparty risk on SCA.

 

XL has already written off its investment in SCA and it must be only a matter of time until SCA seeks Chapter 11 protection. However, the key impediment to this is that XL is conflicted as it is a major creditor of SCA and hence XL would be adversely impacted by bankruptcy protection – more on this later.

 

XL’s major exposure to SCA is via guarantees and reinsurance provided to SCA. XL provides guarantees to SCA in relation to activities prior to IPO which were around $70bn of which circa $19bn are BBB or lower (31 Mar 08).

 

XL also provides certain reinsurance protections to SCA. As at 31 Mar 08, XL’s total net exposure under its facultative agreements with SCA subsidiaries was approximately $6.9 billion.    XL has considerable exposure if the mark-to-market movements on SCA’s credit derivatives reinsured by XL were to widen.

 

Given SCA’s own position it should be seeking chapter 11 but it is run by XL and is hence massively conflicted.  Whatever happens to SCA, XL will be looking after its own counterparty exposure as a creditor to SCA beyond that of its position as a shareholder. This is good for XL shareholders (and SCA debt holders) but not for SCA shareholders. The challenge for XL is navigate this conflict of interest. 

 

XL was the most aggressive and creative insurer of sub-prime and CDO products, so recent IPO of SCA is unlikely to shield XL beyond the next 12 months.  

Total assets of $15.5bn of which $2.4bn are to commercial real estate and $6.3bn are home equity loans. Of these $2.3bn are junior lien mortgages.

Total assets of $15.5bn of which $2.4bn are to commercial real estate and $6.3bn are home equity loans. Of these $2.3bn are junior lien mortgages.