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player ready...Months after the stocks of big Wall Street financial firms first came under attack, insurance companies are now being battered, suggesting that a similar round of consolidation and recapitalization may be in store for that industry.
Insurance stocks have plunged more than 30 percent in the last five days, with Prudential Financial the big loser on Thursday. Prudential’s stock fell $10.02, to $33.27 a share, and it is now 42 percent lower than a week ago. The group is suffering far more than the broader market.
Hartford Financial Services Group raised $2.5 billion by selling shares to Allianz, the German insurer, on Monday. Hartford’s shares closed at $20.11 Thursday, down $4.75.
MetLife, the largest American life insurer, which warned earnings would be sharply lower in the third quarter, raised $2 billion in a stock sale on Wednesday. Even though existing shareholders were left with a smaller stake in the company, investors seemed heartened that the company could get funds readily, making it one of the very few winners Thursday, as all 30 stocks in the Dow Jones industrial average fell. MetLife closed at $28 a share, up $1.
When the government bailed out American International Group, there was little talk of a widespread downturn in the insurance industry. AIG was seen as unique because it was a large issuer of a type of derivatives contracts that were far less prevalent at other insurers.
But now a wave of losses is moving throughout the insurance industry.
“Insurance companies tend to focus on high-quality investments,” said Douglas Meyer, an insurance analyst at Fitch Ratings. When the declines were mainly in the lower-quality investments, he said, the industry was relatively sheltered from harm.
Now, though, Meyer said, “the depths of the current credit crunch is starting to affect the high-grade securities, so that’s starting to affect the insurance companies more.”
For now, analysts do not see insurers in precarious situations. But if the investment losses keep mounting, they will start eating away at insurers’ capital.
The investment losses also will pose a problem for insurers with big retirement divisions, especially life insurance companies. They deal in investment products that guarantee their customers a certain rate of return. Now the insurers will have to make those payments out of their diminished assets.
Insurers whose business models involve large amounts of short-term paper, or other obligations that are maturing soon, also risk being caught short if the credit markets stay frozen. If they have to start selling securities to produce the cash to pay their obligations, they could end up dumping the instruments in a market that has many sellers and almost no buyers.
“If the distressed market conditions persist, this will negatively impact insurance company liquidity,” Meyer said.
Weaker institutions may have trouble raising new money if their capital is eroded, and the government may be unwilling to come to their aid. That suggests a consolidation and reshaping of the industry is in store.
Though MetLife was one of the first big insurers to raise capital in this downturn, it appears to be one of the least in need. Even before it sold 75 million shares for $26.50 a share Wednesday, it had some $4 billion more than the level associated with a strong capital base.
John Hall, a securities analyst at Wachovia, said in a report issued Thursday that he saw MetLife’s stock sale “as a pre-emptive maneuver to facilitate the company’s ability to take advantage of emerging strategic opportunities, including the possible acquisition of AIG units.”
AIG has announced it is selling a large number of its insurance subsidiaries to raise money to pay off its $85 billion bridge loan from the Federal Reserve. And MetLife, meanwhile, has expressed an interest in expanding its foreign operations.