Allstate, Prudential, Lincoln National Halt Buybacks as Holdings Fall

By Erik Holm
Bloomberg News
October 23, 2008

Oct. 23 (Bloomberg) -- Allstate Corp., Prudential Financial Inc. and Lincoln National Corp. suspended their share buybacks this month to cushion against declines in the value of the insurers' fixed-income investments.

Allstate joined its competitors yesterday after posting its first unprofitable quarter since 2005 on investment losses and claims from Hurricanes Ike and Gustav. The $2 billion buyback was scheduled to be completed by March 2009.

"It made sense to suspend that program until there was more stability in the marketplace," Chief Executive Officer Tom Wilson said in an interview. "It's in line with my philosophy of being proactive in risk mitigation."

Insurance executives are looking to avoid the mistakes of former American International Group Inc. CEO Martin Sullivan, who announced an $8 billion stock repurchase in November of last year and then lost his job after raising more than $20 billion in May by selling stock and debt. Insurers are shepherding capital 18 months after they were buying back shares at the fastest pace in at least 20 years to increase the value of their remaining stock.

Travelers CEO Jay Fishman said yesterday he'd "meaningfully reduce" share repurchases in the fourth quarter after posting an 82 percent profit decline for the third.

"The world is a riskier place today than it was a year ago," Fishman said in an interview.

The bankruptcy of Lehman Brothers Holdings Inc., the biggest on record in the U.S., and AIG's government bailout roiled credit markets, pushing down the value of insurers' portfolios. The biggest insurers in the U.S. and Bermuda have reported more than $93 billion in write-downs and unrealized losses tied to subprime loans since the beginning of last year.

Allstate, Travelers

Allstate's holdings declined by $8.6 billion in the three months ended Sept. 30, the company said yesterday. The insurer's portfolio was worth about $105 billion on that date. Travelers posted a $116 million after-tax investment loss as the insurer wrote down the value of securities in Lehman.

Travelers had $818 million in unrealized losses as of Sept. 30, compared with $221 million in unrealized gains on its investments in the same period a year earlier.

"They're preserving capital until this all shakes out," said Jim Ryan, an analyst with Morningstar Inc. in Chicago. "No one knows where we're going with the economy right now so it makes sense to wait until that becomes more clear."

MetLife Inc. said it Oct. 8 it hadn't bought back shares since the first quarter. New York-based MetLife said the day before that gross unrealized losses on fixed-maturity securities jumped by $7 billion to $17 billion in the three months ended Sept. 30.

$12 Billion in Buybacks

MetLife, Allstate, Travelers, Prudential and Lincoln National announced a combined total of about $12 billion in buybacks last year. That's more than the $7.1 billion purchased by 25 insurers in 2006, which at the time was the most in at least two decades, according to Credit Suisse Group AG.

Each insurer's stock has declined since last year. Travelers, based in St. Paul, Minnesota, slumped 31 percent, Allstate 46 percent, MetLife 51 percent and Prudential and Lincoln National declined 64 percent from Dec. 31 through yesterday.

One firm that wasn't buying its own shares then was Berkshire Hathaway Inc., run by billionaire investor Warren Buffett. The company, which typically gets about half its income from its insurance units, didn't repurchase its stock even as its cash holdings grew to $47.1 billion in September 2007.

This year, as credit markets froze and potential rivals lacked the funds to make deals, Buffett has committed at least $28 billion to acquire companies, finance buyouts and purchase securities for Omaha, Nebraska-based Berkshire. Berkshire shares slipped 17 percent this year.

MetLife, Lincoln

Firms including MetLife have gone beyond halting buybacks, opting to raise cash by selling new shares to bolster their capital. MetLife sold $2.3 billion in stock this month. Life insurers have plummeted about 46 percent since Sept. 30 amid concern that competitors will follow in diluting the investments of existing shareholders.

Lincoln National, the Philadelphia-based life insurer, said Oct. 10 it was suspending its buyback and cutting its quarterly dividend by half after investment losses caused third-quarter profit to fall. KBW Inc. analyst Jeffrey Schuman yesterday said the insurer is more likely than competitors to need to raise capital.

Prudential, Ace

Prudential, based in Newark, New Jersey, said on Oct. 9 it was suspending its stock buyback program and that capital needs "if any, would be modest" this year.

Ace Ltd., the insurer that moved its headquarters to Zurich from Bermuda, has questioned whether share repurchases are the best use of capital.

"At the end of the day, it's performance that dictates share price," Ace CEO Evan Greenberg told investors in July when the company's stock slumped as it was removed from the Standard & Poor's 500 Index after the move to Switzerland. "We currently have no plans to support what we consider a transient impact to our share price with buybacks. Our operating performance will ultimately take care of that."

CEOs want to avoid following in the footsteps of AIG's Sullivan, who stepped down in June after record losses tied to U.S. home loans. Seven months earlier, he had told investors the company's problems would be "manageable."

The U.S. government took over the insurer in September when it extended an $85 billion loan in exchange for a 79.9 percent ownership stake that diluted shareholders.

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