June 23, 2024

Archives for October 2008

Next Bailout – Insurance Industry?

Insurance company stocks continued their brutal decline today as questions continued over capital adequacy, credit downgrades, uncertainty on future portfolio write-downs, potential cash calls on CDS obligations and investor disbelief over company statements that all is well.   As noted yesterday, HIG’s stock imploded along with the rest of the industry and I stated that they should come out with very decisive action to stop the vicious downward cycle of stock declines; which is exactly what GE did today by raising cash that they said they really didn’t need.

HIG issued a relatively neutral statement saying that all was well and it’s stock continued to decline.  I don’t think investors will be putting much credence in company statements of assurance after the AIG meltdown where everything was fine until one day it wasn’t and they needed $85 billion and lights out.   With a crisis of confidence, any company that has generated questions on its financial soundness needs to respond immediately before the market makes its own harsh decision.

The insurance industry is in many ways more important to our economy than the banking system; they should take immediate action to  strengthen their balance sheets to ride out this financial crisis.

MET 48.15 10/1/2008 -7.85 -14.00
GNW 7.36 10/1/2008 -1.25 -14.50
ALL 44.00 10/1/2008 -2.12 -4.60
CB 51.55 10/1/2008 -3.35 -6.10
PRU 64.80 10/1/2008 -7.20 -10.00
HIG 38.11 10/1/2008 -2.88 -7.00

HIG Implodes

After the recent implosion of AIG due in large part to their massive credit default swap positions on sub-prime mortgages, investors did not need much encouragement to sell HIG after it disclosed having CDS exposure on AIG debt.  This, along with disclosure of holding debt securities of LEH, AIG and WM in their asset portfolio as well as a possible credit downgrade was enough to cause a brutal 20 point sell off at one point, for an intraday loss of $6 billion dollars.

HIG recovered half of this loss by day’s end but still ended down 18% and the cost of buying insurance on HIG’s debt jumped by over 40%.  We have seen this type of horror show too many times this year.   Management should immediately take steps to raise capital, reduce the dividend and make full disclosure of what CDS exposure they have, before rumors become more important than the facts.  It is interesting to note that despite the brutal sell off of many insurance companies this year and the fast collapse of AIG, the SEC did not place HIG on their restricted short sale list.