Life Insurers Are Finding Their Fates Tied to Stocks

Wall Street Journal Online
March 31, 2009

Once a seemingly stable sector, life insurers are looking like a concentrated bet on the broader market.

On Monday, that wasn't a good bet. Stocks of life insurers plunged, led by Lincoln National Corp., which dropped 38% after the Radnor, Pa., company said late Friday that it withdrew an application to issue debt under a debt-guarantee program run by the Federal Deposit Insurance Corp. Other life insurers also fell more than the Dow Jones Industrial Average's 3.3% decline. MetLife Inc., Prudential Financial Inc. and Hartford Financial Services Group Inc. all had double-digit-percentage declines.

Shares of life insurers have come under pressure in recent months due to weakness in their portfolios of bonds and turmoil in their variable-annuity products -- retirement investment products that become more costly for companies that sell them when stocks fall sharply.

Lincoln National's shares plunged 38% after the insurer said it withdrew an application to issue debt under a guarantee program run by the FDIC.

Those exposures make the sector especially sensitive to market gyrations. Life insurers rallied as the market surged in March. The Dow Jones Wilshire U.S. Life Insurance Index surged 77% through last Friday from its March 9 closing low, a period that saw the Dow Jones Industrial Average gain 19%. The rally helps illustrates how a stronger market could stabilize these stocks.

But with the market's decline Monday, the life-insurance index fell 14%.

Late Monday, Moody's Investors Service lowered Hartford's long-term senior debt rating two notches to Baa3 from Baa1, citing weakness in earnings power, investment losses and its exposure to variable annuities. The ratings agency said the risk of further losses in Hartford's portfolio "is meaningful in view of unsettled markets and deteriorating economic conditions."

Hartford Chief Executive Ramani Ayer said via email the company disagrees with the Moody's ratings actions, adding: "we believe that The Hartford's capitalization is stronger than what was reflected in the actions taken by Moody's."

For some time, life insurers' fates seemed more stable than those of banks, because they tend to invest in historically safe assets such as corporate and municipal bonds. But lately the market seems to expect that more write-downs are inevitable, especially on the commercial real-estate securities some companies snapped up.

Ratings downgrades of the insurers themselves, anticipating these woes, compound problems by making it more difficult for insurers to raise capital as regulators may require.

"If the market takes another steep decline, many of these companies would have little to no excess capital," said Barclays Capital analyst Eric Berg. "If on top of that rating agencies downgrade large numbers of investment-grade bonds, the situation could become grim."

The setback for Lincoln was another in a string of blows for the company, which provides wealth-management products from annuities to life insurance to mutual funds. On March 19, Moody's Investors Service downgraded its senior debt rating to Baa1 from A3, citing its weakened financial flexibility and profitability. Its shares are down 66% year to date.

Lincoln applied for assistance under the FDIC program in January. It said Friday that, upon an internal review, it doesn't believe it qualifies for the program. The company has nearly $1 billion in debt coming due this year, which includes $475 million in short-term commercial paper.

Lincoln said the company didn't meet some of the original goals of the program, such as boosting transactions between banks amid frozen credit markets. "Withdrawal of the application has nothing to do with our financial condition, financial strength and liquidity profile," said Fred Crawford, Lincoln's chief financial officer.

The FDIC said it doesn't comment on individual applications.

Credit Suisse analyst Thomas Gallagher downgraded Lincoln to "neutral" from "outperform" after the news, citing a potential liquidity crunch. The issue is "manageable," he wrote, but "could become more challenging if equity and credit markets weaken substantially."

Lincoln is making moves to shore up capital. Earlier this month, Lincoln said it plans to trim expenses this year, hoping to save about $250 million. The company also has slashed its quarterly dividend 95%.

On Monday, Lincoln said it entered an agreement to cede a large block of life-insurance assets to Commonwealth Annuity & Life Co., a unit of Goldman Sachs Group Inc. That move will provide Lincoln about $240 million in capital relief, primarily from funds it had set aside for the policies, according to Lincoln. It also will reduce future net income the policies would have generated by about $20 million a year.

Analysts said some life-insurance companies seem in better shape than others. Insurer MetLife has solid cash flows from its extensive businesses that can help carry it through the turmoil, analysts said.

The largest insurer in terms of assets, MetLife also has about 11,000 internal agents, making it less vulnerable to customer poaching by rivals. Some insurers, such as Hartford, sell much of their products through third-party agents who are more likely to switch allegiances in volatile times. Hartford declined to comment.

MetLife also faces hurdles. It is saddled with $29.8 billion in unrealized losses that, due to accounting rules, it doesn't need to immediately recognize on its bottom line. If the economy continues to weaken, the company may need to realize more of those losses. MetLife declined to comment.

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