Life Insurers Take a Hit

Fate of the Industry, a Pillar of the Economy, Is Tied to the Deteriorating Health of Banks

The financial markets' downward spiral has drawn the nation's life insurers into its vortex, reducing the already depressed value of industry stocks by a third since early this month and fueling concerns that the condition of some companies could deteriorate in the months ahead.

A Dow Jones index of U.S. life insurance stocks has fallen 32.3 percent since Jan. 6 and almost twice that amount since September. Analysts have warned -- and regulators fear -- that some companies might need to shore up their capital at a time when it has become difficult to borrow or issue additional stock. Meanwhile, the industry has been lobbying regulators for permission to keep less money in reserve to pay benefits and absorb financial shocks.

Yesterday, the Standard & Poor's credit rating service downgraded AFLAC, citing the insurer's investments in banks and other financial institutions that are also deteriorating. Weakness in the broader financial sector could "negatively impact the company's capitalization and financial flexibility," Standard & Poor's analyst Shellie Stoddard wrote.

AFLAC, a big provider of disability coverage, said it was confident in the quality of its balance sheet and did not foresee a need for additional capital.

Life insurers are an important part of the nation's financial system. In addition to paying benefits that help sustain families after the death of a breadwinner, they sell annuities on which people rely for retirement income. To meet commitments to policyholders and generate a profit, they invest in other companies. As major buyers of corporate bonds, they help fund corporate America.

To ensure their ability to meet obligations to policyholders, life insurers are required to maintain prescribed levels of capital.

The weakening economy has left them vulnerable in a variety of ways.

One of the chief concerns is that the recession could reduce the value of the bonds they hold. If the companies that issued those bonds default, or if the bond ratings are cut, the insurers' capital could take a hit.

Another source of pressure is the guarantees some insurers have made to deliver at least minimum annuity payments, because in many cases the return they have promised policyholders is no longer supported by the assets underlying those annuities.

Analysts have also expressed concern that insurers' financial reports might instill an excess of confidence because their balance sheets and reported capital levels are not required to fully reflect the reduced value of investments they hold.

"To the extent that the true value falls below the . . . cost at which they are reflected on the balance sheet, reported book values across the industry could be inflated," Morgan Stanley analyst Nigel Dally wrote in a recent report.

There's also the threat that, in hard times, consumers will buy less insurance or stop making payments on policies they already hold, said Laura Bazer, an analyst at Moody's Investors Service.