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Stocks Of The Hartford, Others Sink On 'Sell' Rating

LIFE INSURERS

DIANE LEVICK

November 12, 2008

An analyst's "sell" rating and fears about more capital-raising, deteriorating investments and annuity losses pummeled several life insurer stocks Tuesday, including The Hartford's.

Goldman Sachs analyst Christopher Neczypor downgraded Lincoln National, Prudential and The Hartford Financial Services Group to sell. The Hartford hadn't been rated by Goldman recently because Goldman represented the insurer in a $2.5 billion capital infusion from Allianz.

The Hartford's stock price plunged $3.31, or nearly 23 percent, to close at $11.24 a share Tuesday. Lincoln fell 15 percent, and Prudential dropped nearly 11 percent. The Hartford has lost 87 percent of its market value this year.

"We believe the next 12 to 18 months will bring continued asset deterioration — notably in commercial real estate — as well as increased losses from embedded guarantees in the annuity products" of the companies, Neczypor wrote in a report to clients.

Among major investment firms, Goldman Sachs had the only sell rating as of Tuesday on The Hartford, Prudential and Lincoln.

Neczypor believes life insurers significantly underpriced guarantees that were included in variable annuities they sold. Many guaranteed a minimum level of income, regardless of how the customer's investments in the annuity perform.

The Hartford, though, is more of a market leader in guarantees of minimum withdrawal benefits from annuities, and the fallout from that depends on equity market performance during the next few years, Neczypor said. Individual variable annuities, a major product for The Hartford, accounted for $92 billion of the life operations' $333 billion in assets under management on Sept. 30.

The Hartford and other insurers have hedging programs meant to protect themselves from big losses on annuity guarantees, but Neczypor questions how effective they'll be.

Neczypor predicted that each of the companies will "need to raise incremental capital," and he said heightened scrutiny by rating agencies and regulators will probably mean increased capital requirements. Rating agencies may downgrade companies around year-end, he said.

He said MetLife, rated as neutral, has a "less pressing need near-term to raise capital."

Shannon Lapierre, a spokeswoman for The Hartford, declined to comment Tuesday on the sell rating and share price decline but referred to the company's comments Nov. 3. That's when The Hartford estimated that it would have $2 billion more in capital at year-end than it needs to maintain AA ratings, assuming an S&P 500 level of 900.

The company also said it has sufficient capital even if markets deteriorate and that it has sources of additional capital, if needed, without tapping public markets.