October 2, 2008 / 7:56 PM / 11 years ago

Insurance stocks drop after Sen. Reid comment

NEW YORK (Reuters) - Insurance stocks, led by Hartford Financial (HIG.N), Principal Financial PFG.N and MetLife (MET.N), fell on Thursday, a day after a top lawmaker raised the question of whether a well-known insurer could be in financial trouble.

A MetLife flag is pictured outside the MetLife building in New York, January 31, 2005. REUTERS/Chip East

Wall Street is already worried insurers will be hurt by investment losses and exposure to recent corporate collapses, including American International Group Inc, Lehman Brothers Holdings Inc and Washington Mutual Inc as well as commercial and residential real estate debt.

U.S. Senate Majority Leader Harry Reid, a Nevada Democrat, said it was imperative that the $700 billion financial bailout plan get legislative approval, adding that a well-known insurer’s solvency could be threatened if financial markets remained volatile.

Reid, speaking to reporters Wednesday, did not name the insurer. A spokesman said Thursday the comments were not directed at any particular company.

“His comments were meant to refer to the conditions in the financial sector generally. He regrets any confusion his comments may have caused,” said spokesman Jim Manley.

Nevertheless, all but two of the stocks in the S&P Insurance Index .GSPINSC fell Thursday, sending the index down 8 percent.

Hartford Financial Services Group Inc, a large life and property insurer, lost 32 percent, its worst one-day percentage drop since at least December 1995.

Principal Financial Group Inc, a large life and health insurer, and MetLife Inc, the largest U.S. life insurer, also fell sharply, closing down 16.3 percent and 15 percent, respectively. Prudential Financial Inc (PRU.N), the No. 2 U.S. life insurer, dropped 11 percent.

Options volatility was also high, indicating investors expected large swings in share price. Buyers of puts, which guarantee the right to sell at a specified price by a certain date, focused on MetLife.

The cost of protecting insurers’ debt with credit default swaps (CDS) also rose. Five-year credit default swaps on MetLife rose Thursday to 11 percent upfront, or $1.1 million a year to protect $10 million of debt, plus $500,000 in annual premiums, according to data from Phoenix Partners Group. The swaps closed at around 525 basis points on Wednesday, according to Phoenix.

The swaps trade upfront when investors grow more concerned that an issuer will default before all the annual premiums are paid.

Hartford swaps rose to 10.5 percent upfront from about 550 basis points, while Prudential’s swaps rose to 11 percent upfront from about 525 basis points.

Still, analysts said none of the companies in the sector were in danger of collapse.

“They’re just going to have horrible quarters and big write-downs, but it’s not going to cause a solvency issue. It’s going to cause an earnings issue,” said Rob Haines, an analyst at independent research service CreditSights.

Alan Rambaldini, an analyst with Morningstar, said investors were concerned that life insurers would have to book higher costs in their variable annuity businesses because of market turmoil.

“People are worried about that, in combination with the investment losses they’ve taken on Lehman and AIG, and Fannie, Freddie,” he said, “and that they’ll have to raise capital in order to keep their ratings with the rating agencies at the current level.”

American International (AIG.N) was rescued by the U.S. Federal Reserve, Lehman Brothers LEHMQ.PK filed for bankruptcy protection, and Washington Mutual WAMUQ.PK agreed to be bought by JPMorgan Chase & Co (JPM.N).

Reid’s comment prompted MetLife to issue a statement saying it was “financially sound” and not the subject of Reid’s comments.

A Hartford spokeswoman, Shannon Lapierre, said Reid was not referring to the company.

Lapierre said Hartford’s recent stock performance was due to “unprecedented market conditions,” adding that the company had a “strong history of managing through challenging times.”

Hartford shares have fallen nearly in half since Monday. The company may be downgraded by both Moody’s and Fitch, raising concerns that it will have to boost capital to address rating agency concerns.

Reporting by Lilla Zuill in New York; Additional reporting by Juan Lagorio and Dena Aubin in New York, Richard Cowan in Washington; Editing by Tim Dobbyn/Jeffrey Benkoe

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