Investors Skeptical Of Life Insurers' Rosy View

By Lavonne Kuykendall
October 8, 2008

CHICAGO -(Dow Jones)- Life insurers are beginning to follow the same script as banks and bond insurers in reporting big market-value write-downs on their investment holdings.

So far, the markets aren't buying insurers' insistence that theirs is a fundamentally different story from the banks' tale. Stock prices of life insurers including MetLife Inc. (MET) and Hartford Financial Services Group Inc. (HIG) plunged this week and last week after they pre-reported third-quarter investment losses and announced efforts to raise capital. Those declines pulled down other life insurers that, like MetLife and Hartford, have big holdings of mortgage-backed securities.

The insurance companies insist they will have few mortgage-driven losses because they can hold onto the securities to maturity and the securities are still paying. The stock market, wary because banks and other financial-services firms had also argued that their mortgage investments were manageable, has begun punishing life insurance companies as well. Shares of MetLife closed down nearly 27% Wednesday to $27, and are down more than 50% in the past month. Shares of Hartford were down 13% to $24.86 Wednesday and are down more than 60% in the past month.

Even Allstate Corp. (ALL), which primarily writes homeowners and auto insurance, was being punished Wednesday, with shares dropping more than 21% to $29.96.

Property/casualty insurers like Allstate generally have shorter-term investment outlooks than life insurers and tend to be more conservative investors, but a few have reported some subprime mortgage exposure. In a Wednesday research note, Jay Gelb of Barclays Capital said Allstate is likely to report above-average investment-related losses relative to book value. Other insurers he named were Progressive Corp. (PGR), XL Capital Ltd. (XL) and PartnerRe Ltd. (PRE).

As happened with the banks and bond insurers, ratings agencies are leading the charge against the shares of insurance companies.

Moody's Investors Service put Hartford's senior unsecured debt rating on review for a possible downgrade Wednesday, citing $2.2 billion in realized investment losses as a factor. Moody's cited Hartford's holdings in structured securities including nonprime residential mortgage-backed securities and commercial real estate securities among the reasons it changed its outlook on Hartford and its life insurance subsidiaries to negative this week.

Potential To Spread

Last week, Fitch revised its outlook for U.S. life insurers to negative from stable, in large part due to the expected earnings impact of investment losses, both realized and unrealized.

In a recent note on Principal Financial Group Inc. (PFG), Fitch said even the higher-rated mortgage-backed securities favored by insurers aren't immune to problems.

"Industry write-downs have the potential to spread to higher rated securities, creating adverse financial effects for the company in the second half of 2008," Fitch said.

Connecticut Insurance Commissioner Thomas R. Sullivan dismissed concerns about Hartford's condition, saying in an email that the company "continues to perform with a well established core business platform. The Hartford Group's financial strength remains solid and will continue to meet policyholder obligations."

In a statement Wednesday, Hartford said it plans to finish the year with a capital margin of $3.5 billion above the required level for a double-A rating.

On Tuesday, MetLife said that gross unrealized losses on its fixed maturity securities rose by $7 billion to $17 billion before taxes at the end of the third quarter from $10 billion in June. MetLife's $328 billion investment portfolio consists of about 6% U.S. Treasury holdings, 26% structured finance, including mortgage-backed securities, 41% corporate credits and 18% in real estate holdings.

Yet MetLife said its actual expected losses on its fixed-income holdings will be around only $490 million. Of the $490 million after-tax in credit related losses, around $375 million or 77% related to defaulting or impaired major financial-services credits such as Lehman Brothers Holdings Inc. (LEHMQ), Washington Mutual Inc. (WM) and American International Group Inc. (AIG).

MetLife says that, except for the $490 million or so in expected losses, the rest of the $17 billion in market-value write-downs will end up being reversed as markets improve. It says most of the write-downs are not even related to the housing market crisis that has helped to bring down AIG, Lehman Brothers, Washington Mutual and others.

At the end of the second quarter, MetLife held around $54 billion in residential mortgage-backed securities. The company said it expected little in the way of losses there.

"We have very little exposure to the most troublesome expects of the residential mortgage market," said William Wheeler, MetLife's chief financial officer, during a conference call the company held Wednesday to discuss its third-quarter results.

The increase in market-value write-downs in the third quarter is primarily driven by credit spreads, not mortgage losses, which Wheeler expects to be minimal.

Shoring Up Capital

Both MetLife and Hartford are shoring up their capital to calm jittery markets, with Hartford selling a company stake for $2.5 billion and MetLife planning a 75 million common stock issue.

Hartford Financial preannounced its third-quarter results Monday.

The company reported net unrealized losses of $3.4 billion to $4.2 billion after tax and deferred acquisition costs. Its realized losses were a much-lower $2.1 to $2.2 billion, and mostly related to its investments in financial-services firms, including Lehman Brothers and AIG, not to its residential mortgage holdings.

A well-placed insurance company insider argued that insurers are far more picky in their securities purchases because they are buy-and-hold investors rather than package-and-sell marketers, as were many banks. "They have skin in the game" and so avoided any mortgages that weren't top notch, he said.

But many are skeptical that life insurers, which hold huge investment portfolios to back insurance policies, will get away that cleanly.

That fear has helped pull down share prices for other life insurers with mortgage-backed securities in their investment portfolios. Principal Financial, Ameriprise Financial Inc. (AMP), Prudential Financial Inc. (PRU), Genworth Financial Inc. (GNW), Lincoln National Corp. (LNC) are among the life insurers that have followed the shares of MetLife and Hartford down in the past week.

Part of the disconnect between life insurers and the rest of the market could have something to do with the art of determining whether market-value write-downs will eventually turn into losses or not.

Life insurers and other financial-services firms "are very different in the timing and the extent of recognizing losses," said Steven Weisbart of the Insurance Information Institute.

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