Stocks Hit Hard as Firms Announce Losses on Investments
By Annys Shin
Washington Post Staff Writer
Saturday, October 11, 2008
Insurance is the latest industry to feel the sting of the global financial crisis.
While most industry insiders consider the problems that led to the government bailout of American International Group as unique to AIG, the pain has been spreading to other insurers -- their shares have taken a beating despite efforts to shore up their finances.
The Standard & Poor's insurance index has dropped 39 percent since Sept. 15, closing yesterday at 134.36. Last week, Hartford Financial Services Group saw its share price drop 52 percent to $27.40.
Now, AIG has thrown a spotlight on insurers' investment practices. Progressive, the nation's third-largest auto insurer, yesterday reported a net loss of $684 million for the quarter ended Sept. 30, the first such loss in eight years, due in part to a write-down of stock in Fannie Mae, Bank of America, Merrill Lynch and Wachovia.
Prudential Financial said on Thursday that losses from investments in AIG, the now bankrupt Lehman Brothers and Washington Mutual, now part of J.P. Morgan Chase, could reach $375 million. Hartford said last month it had more than $500 million of holdings in AIG, Lehman and Washington Mutual, including up to $100 million in credit default swaps -- insurance-like policies that cover losses from securities.
The losses do not mean they need a bailout. Guaranteeing mortgage-related securities made AIG especially vulnerable when homeowners were unable to make mortgage payments and home values dropped.
While insurers have faced competitive pressure to generate returns for investors, their investment practices are closely scrutinized by regulators and tend to be more conservative than that of investment banks, which delved into exotic financial instruments.
"I'm not sure they can be faulted for making the investments they did at the time they did," said Robert Klein, director of the Center for Risk Management and Insurance Research at Georgia State University. "While their stocks are down, if people keep their money with the insurance companies, they should have adequate capital to help them weather the storm."
Nonetheless, insurers have faced pressure from investors to bolster their capital cushion and to try to keep their borrowing costs down. Hartford added $2.5 billion to its financial cushion Monday by selling shares to German insurer Allianz. MetLife, a major player in life insurance, rounded up $2 billion by selling stock.
But as the crisis has spread globally, investors have become jittery and easily set off by any whiff of trouble.
On Oct. 1, Senate Majority Leader Harry Reid (D-Nev.) inadvertently started a selling spree when he said an insurer "with a name that everyone knows" was on the brink of going under. A spokesman for Reid later said the senator had no knowledge of a specific company being in trouble. Hartford, Metlife and Prudential all issued statements saying they were not about to go bankrupt. But the next day their shares dropped. Hartford's stock price fell 32 percent, MetLife's fell 15 percent, and Prudential's fell 11 percent.
Some analysts thought investors may have overreacted in recent weeks but were squeamish about calling on bargain hunters to snap up insurance stocks.
"We view the known unknown as unquantifiable, and therefore remain on the sidelines," wrote Sterne Agee analyst John Nadel in an Oct. 2 research note on Hartford.
Morningstar's Bill Bergman said investors are understandably cautious, given recent events.
"Insurance is fundamentally a promise to pay money. Once the quality of that promise has come into question, you have to respect that [unease] even if it is out of line with fundamentals," he said. "Fear is worth fearing."
Staff researcher Magda Jean-Louis contributed to this report.
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