As U.S. Life Industry's Market Cap Tanks, Access to Cash Gets Tougher

Fran Matso Lysiak
Bestwire, A.M. Best
March 23, 2009


With credit-related investment losses and slumping stock markets hammering their profits for more than a year, the U.S. life insurance industry's total market capitalization has dropped in a big way. That makes it difficult for some companies to use their own stock to access cash at a time they're preserving as much of it as they can by suspending share buyback programs.

The 19 life companies in the A.M. Best U.S. Life Insurance Index lost $216.1 billion, or 83.6%, in total market capitalization, from Jan. 1, 2008 through March 6, 2009. Market cap is an estimation of the value of a public company by multiplying the number of shares outstanding by the current price of a share.

A company can use its stock to raise money if it needs to, but now, some companies can't count on their stock or market capitalization, due to market conditions, said Cynthia Jamison, national managing partner of restructuring services for Tatum LLC, an executive services firm that provides interim chief financial officers to companies undergoing significant change. Companies' life preservers are essentially gone now, she said.

According to the AMBUL, MetLife Inc.'s stock price has declined 79.7% and its market cap dropped by nearly $35.8 billion; Prudential Financial's stock price has sunk 87.5% and its market cap dropped by nearly $37.3 billion. Lincoln National Corp.'s stock price has plunged 91.4% and its market cap fell by about $14.5 billion.

Financing can be arranged by using the power of the market cap, said Bruce Fenton, president of Atlantic Financial Inc., an independent money management firm that focuses on global investing. When a company's market cap drops, its financing options, which include the use of its stock, become limited because it's worth less, he said.

"In this environment, raising capital will be difficult and, when it is available, probably costly," said Steven Weisbart, chief economist of the Insurance Information Institute. However, life insurers can increase their capacity by increasing the amount of risk they cede to reinsurers, he said.

The AMBUL index provides insights as to what companies did with their stock. Many had a drop in total shares from Jan. 1, 2008 through March 6, 2009, as calculated by Dow Jones for A.M. Best insurance stock indexes. This may indicate share-buyback programs at many of the companies.

Generally, a company with extra cash that believes its stock has been "unfairly beaten" by the market would engage in a share buyback in an effort to prop up the stock price, said Fenton.

But many companies in corporate America suspended share buybacks right after the Lehman Bros. bankruptcy in September, said Peter Miralles, president and CEO of Atlanta Wealth Consultants. Soon after, executives questioned where money was going out the door the fastest, Miralles said. "The stock buybacks are the obvious choice to stop the bleeding right away," Miralles said.

Bob DeFillippo, a spokesman for Prudential Financial, said that from Jan. 1, 2008 until Oct. 10, 2008, the company repurchased 29.3 million shares at cost of about $2.2 billion. It then suspended the buybacks, he said.

Lincoln National repurchased a total of 9.09 million shares in 2008, and suspended the buyback in the third quarter of 2008 to preserve capital, said Laurel O'Brien, a Lincoln spokeswoman.

As the credit crisis worsened, companies suspended discretionary spending, Jamison said. A share buyback is "a luxury purchase" that's a discretionary use of extra cash, or excess capital, she said.

There's "paranoia around liquidity," Jamison said. "Everyone is just hoarding right now because they are worried about how long and how deep this is going to go."

Meanwhile, if a company is selling stock, it needs cash, Jamison said.

MetLife issued 108.8 million of shares during Jan. 1, 2008 to March 9, 2009, said spokesman John Calagna, noting the company never officially suspended its buyback program. However, MetLife doesn't plan to make any purchases under the repurchase program in 2009.

A possible reason MetLife issued shares last year was that it may have been looking to participate in any sale of parts of American International Group Inc., said Steven Schwartz, an equity analyst with Raymond James in Chicago.

The 108.8 million shares included 86.25 million shares in a common share offering -- raising about $2.3 billion and 19.5 million shares issued alongside the remarketing of junior subordinated debentures originally issued in 2005 in conjunction with equity units, Schwartz said.

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