While the banks are getting hammered by investors spooked by Mike Mayo’s comments today, the nations largest insurers are more of a mixed bag. Prudential Financial is off around 5 per cent, Hartford Financial is up 4 per cent and MetLife is basically flat.
But a new report from Aaron Elstein in Crain’s New York suggests that the insurers could be facing huge losses stemming from write-downs on their investment portfolios and may need to raise new capital to restore their financial health.
From Crain’s (not yet online):
Unless the federal government intervenes for yet another financial sector bailout, experts warn of the biggest wave of life insurer failures in 20 years. “The industry is getting hit from all directors,” says Rob Haines, an analyst at independent debt research firm CreditSights. “I never imagined we’d come to this.”
MetLife Inc., the largest life insurer, faces up to $30 billion in investment losses—nearly double the so-called adjusted capital that MetLife is required by regulators to set aside to cover its obligations, according to CreditSights. Prudential Financial Inc. is looking at $11 billion in losses, and Hartford Financial Services Group Inc. as much as $15 billion. The three insurers’ cushions to absorb losses are tiny, with equity at less than 5% of assets.
Some life insurers could be in jeopardy if markets decline further, warns longtime insurance analyst Gloria Vogel, a managing director at Vogel Capital Management. “The margin for error,” she says, “has become terribly small.”
…To offset potential losses, insurers must raise cash. MetLife was able to tap about $400 million in government-guaranteed debt last month, but few others have that option. Some are seeking bailout money under the U.S. Treasury’s Trouble Asset Relief Program—in fact, several insurers have bought banks in recent months to qualify. Mr. Haines estimates that MetLife could receive as much as $9 billion, Prudential $5 billion and Hartford more than $3 billion. Prudential declined to comment on how much TARP money it seeks.
Of course, the insurers are blaming accountants and mark-to-market accounting rules for write downs
[Linda] Lamel, who serves on the board of American Progressive Life & Health Insurance Co., says accountants are forcing companies like hers to value even well-performing bonds at unreasonably low prices because they contain some subprime mortgages. Her reaction to the bean counters: “We say, “Come on, guys! The issuer is still solvent, we’re getting the dividend, and we don’t intend to sell.’ “
Life insurers got a major boost last week when U.S. accounting standard-setters granted financial institutions greater leeway in deciding how to value their distressed investments.
See? It’s just those pesky accountants and their damn mark to market rules. Too bad that argument was effectively erased by the study done by Harvard and Princeton professors we linked to this morning.