December 21, 2024

Insurance Industry Meltdown Continues

Insurance company stocks again suffered major losses today, with MET down 15%, PRU down 11% and HIG down a stunning 32%.   The Wall Street Journal reported on the various reasons for the continuing sell off including the poorly timed comment by Senator Reid that “someone in the Democratic caucus had said a major insurance company, “one with a name that everyone knows,” was on the verge of bankruptcy.”  A spokesman for his office later attempted to soften the statement but the damage was done.

The market value loss today on these three major US insurance companies totaled almost $12 billion and the total market cap loss from the 52 week highs on MET, PRU and HIG total a stunning $61 billion.   The horrific asset value losses being seen on virtually every asset class will have a devastating negative wealth affect on consumer spending which will in turn lead to major job losses as virtually every industry in the country experiences lower demand; this cycle is of course self reinforcing.

The Wall Street Journal also reported all three companies stating that their business was basically sound and that capital levels were fine.

On Thursday, MetLife said it had terminated some reinsurance contracts, so it will get back by late January $600 million in premiums it had paid. The company said the move had nothing to do with capital considerations.

All three firms distanced themselves from Sen. Reid’s remark Wednesday. Hartford also said the firm’s “liquidity remains strong.” MetLife said the company “is financially sound.” A Prudential spokesman said it has “a lot of cash at the parent-company level.”

My take on this is that things are obviously not fine but at a critical stage since insurance companies, as with banks, rely on confidence and right now there is a crisis of confidence.   After the AIG debacle, which occurred despite many assurances of financial health from the company before it imploded, investors are obviously giving little credence to assurances of any kind, especially when it is not possible to know what type of exotic financial timebombs (CDS, etc) that may be lurking in the portfolios.

In the past, this type of panic sell off would have provided an incredible buying opportunity for these three great American financial institutions, and this may indeed turn out to be the case.  My advice – wait and see who survives since trying to buy any selloffs in this bear market has more often than not produced some very fast losses.

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.

STOCK CLOSED CHANGE %CHANGE
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.