but,
nsurers tumble on concern about capital
Stock-market losses may knock the value of asset-gathering businesses
By Alistair Barr, MarketWatch
Last update: 6:36 p.m. EDT Oct. 1, 2008
SAN FRANCISCO (MarketWatch) -- Insurers tumbled Wednesday on concern stock-market losses and exposure to troubled companies could force some in the sector to raise capital to avoid damaging downgrades from rating agencies.
Insurers with large fixed and variable annuity operations and other asset-gathering businesses were among the biggest decliners.
Phoenix Cos. (PNX
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PNX) , which sells variable annuities to rich people, slumped 18% to close at $7.60. MetLife Inc. (MET
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MET) , another leading annuity provider, dropped 14% to $48.15, while retirement-savings specialist Principal Financial Group (PFG
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PFG) lost 13% to $37.64.
Hartford Financial Services Group (HIG
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HIG) , one of the largest variable-annuity providers, fell 7% to $38.11, adding to Tuesday's 18% slump.
Variable annuities are products that are like mutual funds wrapped up in an annuity. The profitability of the business depends on the performance of the funds. Fees generated over the life of the annuity help insurers cover the up-front costs of selling the product. These expenses are spread out as deferred acquisition costs, known as DAC.
"If the profitability of annuity business is lower than expected, the value of insurers' DAC assets have to be taken down," said Stewart Johnson, a portfolio manager at Philo Smith & Co., an insurance-focused investment firm.
Most insurers assume that the stock market will rise roughly 8% a year when valuing their DAC assets, he noted. So far this year, the S&P 500 Index (SPX
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SPX) has dropped more than 20%.
Johnson said his fund has generated positive returns so far in 2008, partly by avoiding insurers that have large asset-gathering business.
Fitch Ratings lowered its outlook on Hartford earlier this week, partly on concern that the insurer will take a charge related to the DAC assets of its variable annuity business.
That, combined with losses from exposures to troubled companies including Lehman Brothers Holdings Inc. (LEH
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LEH) , Washington Mutual Inc. and American International Group Inc. (AIG
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AIG) , could eat into Hartford's capital, according to Fitch.
Hartford can "address near-term deterioration in its capital position following these asset write-downs," Fitch said. However, "conditions in the financial markets could experience further deterioration and thus provide additional challenges."
Philo Smith's Johnson said insurers' capital levels are more than sufficient for regulators, but pointed out that rating agencies hold companies in the sector to a much higher standard. DAC charges and other losses from exposure to troubled companies could be enough to force some companies to raise new capital, he added.
Hartford said on Wednesday that it was "disappointed" with the recent performance of its shares.
"We are living through a period of unprecedented market conditions," the company commented. "Core operating businesses are performing well and our liquidity remains strong."
"We are confident in our financial strength and in our ability to meet our commitments to customers," the insurer said. "Nothing is more important to us than honoring those promises and maintaining our strong ratings."
American Equity (AEL
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AEL) , which offers fixed annuities, dropped 20% to $6.02. End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco.
Source: http://www.marketwatch.com/news/story/story.aspx?guid={4F409AAF-71D9-4AE0-BC3E-9D8F63AB629C}&siteid=rss 
