Insurance Holders Should Be Protected

Investors have painted their latest bull’s-eye on the backs of insurers.

Though some large insurers have been holding up better than some investment banks in recent months, this week they have taken their lumps. Hartford Financial Services Group, MetLife Inc. and Prudential Financial declined four of the past five trading days. Hartford fell 32% Thursday alone and is down 70% this year.

Industry investor worries concern problems in the stock and credit markets, where insurers are major players and are exposed on several fronts. Hartford, MetLife and Prudential all say they are financially strong.

Investors don’t have to look far for an example of what is at stake: The government rescued American International Group Inc., one of the world’s largest insurers, last month when it was at risk of having to declare bankruptcy.

AIG faced some pressures that most other insurers don’t, in part because it sold complex derivatives that required it to post billions of dollars in collateral under certain circumstances.

But other significant issues have lately gripped the attention of investors and analysts. Fitch Ratings this week lowered its outlook on the entire U.S. life-insurance sector from stable to negative.

Senate Majority Leader Harry Reid on Wednesday said that someone in the Democratic caucus had said a major insurance company, ‘one with a name that everyone knows,’ was on the verge of bankruptcy. A spokesman on Thursday dialed back, saying Sen. Reid ‘is not personally aware of any particular company being on the verge of bankruptcy’ and was referring to ‘the financial sector generally.’

Insurers are major investors, and many have already been forced to write down the value of their investments significantly, and investors fear additional steep write-downs could be coming. Fitch said that the industry’s statutory capital levels had fallen 4% in the first half of 2008 and said it expects that drop to accelerate in the second half.

Another concern: insurers’ variable-annuities businesses, which let customers invest in stock and bond funds through an insurer. Insurers make assumptions about returns and fees in accounting for the contracts.

When Fitch switched its outlook on Hartford to negative from stable this week, it cited among other issues an annual update that Hartford conducts of its variable-annuity contracts in the third quarter. Hartford said in late July that there could be an after-tax charge of $330 million to $640 million related to its variable annuities.

Some insurers are also involved in another business lately getting squeezed on Wall Street — securities lending. Under these programs, companies such as insurers lend out stocks in their portfolios. In exchange, they get collateral that they can then turn around and invest, and pocket the profit. The risk is that whatever insurers invest the collateral in falls in value, and that when they have to give back the collateral, they have to eat the losses, or find the cash elsewhere.

MetLife and Prudential have securities-lending programs. At the second quarter’s end, Prudential had lent out $7.1 billion on securities compared to total investments of $180 billion. A spokesman called the program ‘quite modest.’

On Thursday, MetLife said it had terminated some reinsurance contracts, so it will get back by late January $600 million in premiums it had paid. The company said the move had nothing to do with capital considerations.

All three firms distanced themselves from Sen. Reid’s remark Wednesday. Hartford also said the firm’s ‘liquidity remains strong.’ MetLife said the company ‘is financially sound.’ A Prudential spokesman said it has ‘a lot of cash at the parent-company level.’