The Hartford, Phoenix Caught In Market Downdraft

Congress and federal regulators scrambled late last week to prevent the financial crisis that has decimated U.S. investment banking from claiming another victim: the insurance industry.

The Senate’s decisive vote for a $700 billion emergency plan paved the way for massive government funding to contain the crisis. And the Securities and Exchange Commission extended its ban on short-selling of financial institutions to prevent speculators from hitting battered insurance stocks when they’re down.

But the market remained skeptical, based on the spike in the cost of protecting against a default by Hartford Financial Services Group Inc., Prudential Financial Inc. and MetLife Inc., Bloomberg reported.

Senate Majority Leader Harry Reid may have added to the tensions by stating publicly that a “major” insurer was “on the verge of going bankrupt” if Congress did not enact the $700 billion plan. He declined to name the firm at risk.

The Hartford said in a statement Wednesday that it was “confident in our financial strength and in our ability to meet our commitments to customers.” The company noted that the rating agencies Moody’s and Fitch had maintained its AA financial strength ratings, though it acknowledged the rating agencies’ more negative outlooks.

The SEC’s initial emergency ban on short selling — selling borrowed shares that must be repurchased later in a bet a stock will decline — was set to expire Oct. 2. The agency extended the ban until Oct. 17, or until the third business day after final enactment of the $700 billion bailout, whichever comes first. That move gives insurers a few days of breathing room before short-sellers are permitted to exert new downward pressures on the stocks.

Strains on the insurance industry became public when American International Group, the world’s largest insurer, needed an $85 billion government bailout to stay afloat. Many of AIG’s problems have been traced to credit default swap contracts held by its AIG Financial Products unit, which has major operations in Wilton. AIG also owns The Hartford Steam Boiler and Insurance Co., a local commercial insurer.

Feeling The Pain

“The insurance industry’s financial performance in 2008 has been bruised by the bloodshed on Wall Street,” Bob Hartwig, president of the Insurance Information Institute, said in a recent report.

Last week, shares of The Hartford and Phoenix Cos. Inc. were hit especially hard, while most of the large insurers with major Connecticut operations felt the pain too, including Cigna, Aetna, MetLife, and Travelers.

In particular, shares of The Hartford lost ground all week and were trading more than 60 percent below their 52-week high of $99.21. The stock’s decline followed disclosures that it had significant exposure to AIG and two giant failures, Washington Mutual and Lehman Brothers. That led Fitch to announce that it was lowering The Hartford’s outlook from stable to negative.

The U.S. House’s initial rejection of the $700 billion emergency plan also hurt the insurers’ stocks.

Keefe Bruyette & Woods has predicted The Hartford could experience as much as $800 million in realized capital losses or write-downs.

And, while near-term capital quality will remain at adequate levels, Fitch said, “Conditions in the financial markets could experience further deterioration and thus provide additional challenges for the company.”

The Hartford said in its statement that its core businesses are doing well and that its liquidity “remains strong.”’

More Hits

Meanwhile, shares of The Phoenix slumped 18 percent Wednesday to close at $7.60, down 47.5 percent from its 52-week high of $14.48.

The decline occurred on the heels of its disclosure that it holds $135.4 million in senior and subordinated debt in six different troubled financial institutions.

The company’s variable annuity business is also causing problems. Life insurers with large variable-annuity operations are taking a hit because the profitability of their products is tied to the performance of the stock market. So far this year, the S&P 500 has dropped 21 percent.

The Hartford’s life insurance operations, which sells variable annuities, has seen a drop in capital levels caused by a deterioration in asset values and a decline in earnings, Fitch said in its report.

Meanwhile, Cigna and Aetna have also disclosed investments tied to troubled financial institutions. On Oct. 1 their stocks closed at $33.76 and $37.43 respectively, a 41 percent and 38 percent decline over their 52-week highs.

There are also factors beyond Wall Street that are negatively affecting all segments of the insurance industry.

Health insurers, for example, face the possibility that Congress will cut reimbursement levels on government-sponsored Medicare Advantage Plans, which they run to serve about 9.5 million seniors. Congress has proposed spending less on them to reverse a cut in reimbursement levels for doctors.

Medicare Advantage accounts for 6 percent of Aetna’s earnings, an analyst said.

Billion-Dollar Losses

In yet another industry sector, property and casualty insurers face a myriad of challenges. They suffered a net underwriting loss of $5.6 billion during the first half of 2008, compared to a $14.4 billion gain during the same time period last year.

Catastrophe losses reached $10.3 billion during the first half, their highest level for any first half since 1994, fueled primarily by record-breaking tornado activity, severe hail and wind losses, the report said. Those losses don’t even include the impact of Hurricane Ike, which slammed Galveston, Texas on Sept. 13.

Insured losses from that storm are estimated at $9.8 billion, making it the fourth most expensive storm in U.S. history.