Insurers: next to be hit?

NEW YORK: After banks, are insurers next?

Yamato Mutual Life Insurance, a Japanese insurer, filed for bankruptcy protection yesterday, while in the United States, insurance stocks like Prudential Financial and Hartford Financial Services have plunged more than 30 per cent in the last five days.

When the government bailed out American International Group (AIG), there was little talk of a widespread downturn in the insurance industry.

AIG was seen as unique because it was a large issuer of a type of derivatives contracts that were far less prevalent at other insurers. Those derivatives brought AIG to the precipice.

But now a wave of losses is moving throughout the insurance industry, caused by the seize-up of the credit markets and shares across the board plunging in value.

'Insurance companies tend to focus on high-quality investments,' said insurance analyst Douglas Meyer at Fitch Ratings. When the declines were mainly in the lower-quality investments, he said, the industry was relatively sheltered from harm.

Now though, 'the depths of the current credit crunch is starting to affect the high-grade securities, so that's starting to affect the insurance companies more'.

Prudential Financial, for one, said on Thursday that operating income from its financial-services businesses would be no more than US$375 million (S$555 million) in the third quarter, compared with US$907 million in the third quarter last year. Along with other investment losses, Prudential will write down investments on securities in Lehman Brothers, AIG and Washington Mutual. Prudential, which will issue its third-quarter earnings on Oct 29, also said it was suspending a stock buy-back programme to conserve capital.

For now, analysts do not see insurers in precarious situations. But if investment losses keep mounting, they will start eating away at insurers' capital. Even insurers with conservative investment portfolios, like MetLife, are not immune. The investment losses will also pose a problem for insurers with big retirement divisions, especially life insurance companies. They deal in investment products that guarantee their customers a certain rate of return. Now, the insurers will have to make those payments out of their diminished assets.

Insurers whose business models involve large amounts of short-term paper, or other obligations that are maturing soon, also risk being caught short if the credit markets stay frozen. If they have to start selling securities to produce the cash to pay their obligations, they could end up dumping them in a market that has many sellers and almost no buyers.

That was what felled Yamato Life in Japan. But Japanese officials and analysts were quick to play down the risk to other insurers in the country. Yamato, a small unlisted insurer, had invested in hedge funds and real estate investment trusts (Reits) to boost returns, in stark contrast with the conservative strategies most Japanese financial institutions have followed since a 1990s asset price crash.

Fitch, though, lowered its outlook for the US life insurance sector to negative from stable at the end of last month. It said some insurers had delayed recognising unrealised investment losses this year, in hopes their impaired assets would regain value. But that has not happened, so the industry is likely to write down more impaired assets in the coming months.

Weaker institutions may have trouble raising new money if their capital is eroded, and the US government may be unwilling to help more insurers after rescuing AIG. That suggests a consolidation and reshaping of the industry is in store.



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