EMC Expects Investment Loss Resulting From Fannie Mae, Freddie Mac Holdings

DES MOINES, Iowa, Sep 10, 2008 (A. M. Best via COMTEX) -- FRE | Quote | Chart | News | PowerRating -- Iowa-based insurer EMC Insurance Group expects to record an other-than-temporary impairment in the third quarter from its investments in mortgage agencies Fannie Mae and Freddie Mac.

EMC (NASDAQ:EMCI) did not disclose the amount of loss, but said its investment in the perpetual preferred stocks of Fannie Mae and Freddie Mac is included in equity securities available for sale at a cost of $10 million and $6 million, respectively. "These securities currently trade at 7% to 12% of par value," EMC said in a statement.

Just days ago, the government announced it would place the agencies under conservatorship. The plan, aimed at stabilizing the liquidity of the U.S.mortgage market, creates a new lending facility available to the government sponsored agencies and Federal Home Loan Banks and a temporary program under which the Treasury will begin purchasing mortgage-backed securities issued by the agencies.

Holders of common stock were diluted 80% as part of $1 billion Treasury infusions in each of the agencies, and holders of preferred stock also saw their dividends suspended.

Following the takeover, it was announced that Herbert M. Allison Jr., former chairman and chief executive officer of retirement plan giant TIAA-CREF, will take the helm of the Fannie Mae (Bestwire, Sept. 8, 2008).

EMC is hardly the only insurer with investments in these government-sponsored agencies. According to an A.M. Best report, the U.S. insurance industry's investments in securities issued by Fannie Mae and Freddie Mac totaled about $371 billion as of year-end 2007, but $366.4 billion of that total was represented by investments in fixed-income securities (Bestwire, Aug. 18, 2008). U.S. insurers held about $4.0 billion in preferred stock and $265 million in common stock.

Besides the perpetual preferred stocks, EMC said it does not hold any other equity securities issued by Fannie Mae or Freddie Mac.

EMC Insurance Group owns subsidiaries with operations in property and casualty insurance and reinsurance. The EMC Insurance Cos. currently has a Best's Financial Strength Rating of A-(Excellent).

(By David Dankwa, senior associate editor, BestWeek: David.Dankwa@ambest.com)

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