Insurers shares sink amid concerns about capital

NEW YORK (Reuters) - The shares of insurers sank on Thursday as concern mounted about further capital needs in the middle of the worst credit crisis since the Great Depression.

Among the biggest losers were XL Capital Inc (XL.N), a large Bermuda-based insurer, whose shares fell 52.2 percent to $4.15, and Prudential Financial Inc (PRU.N), the second-largest U.S. life insurer, whose shares were down 21 percent at $34.21 in afternoon trading.

Following the industry's trend were Principal Financial Group Inc (PFG.N), which lost 31.6 percent to $14.87 a share, and Lincoln National Corp (LNC.N) and Protective Life Corp (PL.N), down 50 percent at $13.94 and 47 percent at $9.72, respectively.

"There's going to have to be some additional capital raises," said Michael Nix, portfolio manager of Greenwood Capital Associates.

Nix said it would become increasingly difficult to raise capital in the current credit environment, which has led a number of banks in the United States and abroad to seek bankruptcy protection, or to look desperately for a buyer at fire sale prices, and forced government bailouts worth close to $1 trillion.

"It's easy to say we're going to raise capital or we want to raise capital, but at the end of the day, who is going to provide you that capital?" Nix said. "You can get capital, but it's going to cost you. There is going to be a haircut" in the price.

American International Group Inc (AIG.N) shares fell 21 percent to $2.51, one day after the company said it would get more liquidity from the government.

AIG, once the world's largest insurer, got an $85 billion loan from the government three weeks ago when it was on the brink of collapse. Under the new plan, the Federal Reserve Bank of New York will take up to $37.8 billion in investment-grade, fixed-income securities from AIG in exchange for cash.

"The government has effectively provided them support for $110 billion, I think they have exhausted that avenue and so I think as they move forward their options have diminished," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.

Last week, AIG said it would sell businesses to repay the government loan.

Earlier this week, Allianz SE (ALVG.DE), Europe's biggest insurer, said it would invest $2.5 billion in U.S. life and property insurer Hartford Financial Services Group Inc (HIG.N).

In addition, MetLife Inc (MET.N), the largest life insurer in the United States, sold new shares at a discount, raising $2 billion, in a deal designed to bolster its balance sheet and potentially allow it to make acquisitions.

But credit default swaps on both insurers began trading on an upfront basis on Thursday, indicating increasing concerns over their credit quality.

Credit default swaps trade on an upfront basis when a company's debt is considered distressed and sellers of protection want to be paid more at the outset of the contract due to higher perceived risk of the firm defaulting on its debt.

Hartford shares were down 17.8 percent at $20.42, while MetLife shares were down 1 percent at $26.71.

Insurers have been under pressure to keep solid capital positions to maintain their ratings after their investments lost value as financial markets sank in recent weeks.

Keeping high ratings is essential for insurers because lower ratings can mean higher costs and, in some cases, even a loss of business.

(Editing by Toni Reinhold and Andre Grenon)