stock markets are creating a perfect storm for US insurers, as the
industry’s market capitalisation plummets, and the timing could not
be worse. Even as insurers find themselves in dire need of access
to their own stock to maintain cash, the market capitalisation
crunch means they must preserve capital by suspending or
dramatically reducing share buyback programs, which turns off
shareholders and Wall Street analysts.
Having survived the initial fiscal crisis ushered in by the AIG
disaster, the US life industry now find itself squarely back in the
crosshairs, with many analysts alarmed at how little cushion exists
for some of the industry’s biggest players.
The 19 life companies in rating agency AM Best
US Life Insurance Index lost $216.1 billion, or 83.6 percent, in
total market capitalization, between 1 January 2008 and 6 March 6,
2009. Market capitalisation – an estimate of the value of a public
company generated by multiplying the number of shares outstanding
by the current price of a share – is considered a threshold measure
of a firm’s fiscal flexibility. When a company’s market
capitalisation drops, its financing options, which include the use
of its stock, become limited because it is worth less.
According to the AM Best, MetLife’s stock
price declined 79.7 percent and its market cap dropped by nearly
$35.8 billion; Prudential Financial’s stock price sunk 87.5 percent
and its market cap dropped by nearly $37.3 billion; and Lincoln
National’s stock price plunged 91.4 percent, and its market cap
fell by about $14.5 billion.
Such steep declines in market
capitalisation mean that raising capital becomes more difficult and
more costly for insurers, who might find that the only way to
increase their capacity is by increasing the amount of risk they
cede to reinsurers.
Traditionally, a company with extra cash that
believes its stock has been unfairly punished by the market would
engage in a share buyback in an effort to prop up the stock price.
But most US companies suspended share buybacks in the wake of the
Lehman Brothers bankruptcy in September 2008, because a buyback is
considered discretionary spending.
In today’s volatile marketplace, the signal
sent by buybacks to the market – that a company needs cash – is too
risky for insurers looking to reassure investors.
Meanwhile, the hits just keep coming. A Dow
Jones index of US life insurance stocks has fallen 32.3 percent
since 6 January 2009 and almost twice that amount since September
2008. 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
Last month, the Standard & Poor’s credit
rating service downgraded life and health insurer 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 capitalisation and
financial flexibility,” Standard & Poor’s analyst Shellie
Worst may not be over
The continued weakening of the
economy has left life insurers vulnerable in a variety of ways that
have analysts reassessing whether the industry has seen the worst
of the current crisis.
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
Analysts have also expressed concern that
insurers’ financial reports might instil an excess of confidence
because their balance sheets and reported capital levels are not
required to fully reflect the reduced value of investments they
“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.
Some insurance companies, such as Principal
Financial Group, have been seeking access to federal bailout funds
through the Treasury Department’s Troubled Assets Relief Program,
or TARP. To become eligible for the programme, Hartford Financial
Services Group, Lincoln Financial Group and Genworth Financial have
sought to convert themselves into savings and loan holding
Some life insurers are faring better than
others, and some of the nation’s giants retain triple-A ratings,
including Massachusetts Mutual Life Insurance, New York Life
Insurance, Northwestern Mutual Life Insurance and TIAA-CREF.
But as the economy buckles, analysts say many
insurers face losses that can eat away at the capital cushions
regulators require them to maintain. If life insurers stop buying
bonds, the capital markets may not fully recover, say insurance
industry representatives and analysts.
Already, their buying activity has slumped. In
the fourth quarter of 2008, life insurers agreed to buy $3.3
billion in stocks and bonds through private transactions, down 63
percent from the previous quarter, according to a survey by the
American Council of Life Insurance. Insurers have been putting more
cash into safe havens such as Treasury bonds.
The industry has several things in its favour.
Life insurers will likely continue to generate cash from the
premiums on their policies, some analysts and executives say. And
unlike investment banks and many other financial firms, life
insurers do not need to routinely raise money in the capital
markets to fund daily operations. Few of the biggest ones have any
sizable debt of their own maturing in 2009. Many insurers have
built up big cash chests recently, by hoarding their incoming
premiums. Now the hope is that the market will recognise that in
the coming months.