Insurers Breathe Sigh of Relief Over CIT

CIT Group ( CIT) is looking safe, at the moment, as bondholders have agreed to hand over the $3 billion in funding the company had been asking the U.S. Treasury to provide.

Bondholders, including the 300 insurance companies that hold $3 billion in CIT bonds, breathed a sigh of relief.

CIT's stock gyrated, alternately sinking and soaring by as much as 75% in one day. There was talk of funding by JPMorgan Chase ( JPM), among others. After all was said and done, the insurer's shares were close to where they were before the crisis had reached a critical state.

The deal was reportedly brokered by Pimco, a subsidiary of Allianz ( AZ), which holds about $98 million in CIT bonds, according to SNL Financial.

Pimco has had some recent success. In a game of brinksmanship between General Motors' ( GMGMQ) GMAC and bondholders, neither side was prepared to move, and it appeared GMAC could have been forced into bankruptcy earlier this year. Finally someone blinked, and it was neither of them. The Federal Reserve changed the rules and agreed that GMAC could form a bank holding company without bondholders' agreement. GMAC holds $21 million in CIT bonds.

Faced with the Treasury's refusal to provide financing, CIT was in dire trouble on Friday, and the negotiations with JP Morgan could well have been a precursor to Chapter 11 bankruptcy as much as a discussion about providing funding. That would have benefited JPMorgan if it had taken over CIT with a much lower debt structure.

Fortunately for CIT and insurers, a deal was struck. Other insurance companies included Aflac ( AFL), with an estimated $218 million; Manulife Financial ( MFC), with $147 million; Zurich, with $146 million; and Genworth Financial ( GNW), with $139 million.

Insurance companies have suffered with every twist and turn of the financial crisis, from the failure of Lehman through the stock-market crash. Insurers' profitability in the first quarter was spotty. Some showed signs of recovery, such as MetLife ( MET), which holds $10 million in CIT bonds. Others, such as American International Group ( AIG), which has $64 million in CIT bonds, recorded losses.

Bondholders usually recover a good proportion of a bond's value during a bankruptcy because of their priority position. The $3 billion exposure for insurers would have been more of an inconvenience for most, reducing profits, but little else.

The problem is that a failure, like CIT, would cause a ripple effect, from the retailers struggling to obtain financing to returns of insurers' investments.

For some, though, it could have been a serious hit on top of losses already taken. Smaller insurers, such as Phoenix ( PNX), is expected by analysts to lose around $74 million this year. It has $12 million in CIT bonds. Conseco ( CNO), with $20 million in CIT bonds, probably didn't enjoy the past few days either.

The relief might be short-lived, with the ability of CIT to meet future debt repayments being questioned. The loan arrangement will simply buy CIT time to resolve its future. If it can't make appropriate improvements to its financial structure, Chapter 11 bankruptcy is very much still on the cards.

Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.

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