Insurance stock, bond rally may be false signal

A recent spike in the price of life insurance company shares and bonds may seem to herald better days for the beleaguered sector, but experts warn that spring hasn’t quite arrived.

“I would be careful in taking great solace in the late thawing of the market,” said Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pa.

Carriers are likely to face problems this year as real estate and corporate-bond assets on their balance sheets come under pressure, he predicted.

“This hearkens back to what exactly is the value of the assets and whether the insurers can raise additional capital to support their overall credit quality,” Mr. Egan added. “Unfortunately, it may be harder and more expensive for carriers to raise capital.”

Although insurers’ debt securities are trading nowhere near their pre-crash levels, the Federal Reserve’s furious monetary creation helped narrow spreads between Treasuries and life insurance company bonds in late December. That improvement drove insurers’ shares higher, Mr. Egan said.

Among those carriers benefiting from the share price run-up was The Hartford (Conn.) Financial Services Group Inc., which enjoyed a 94.3% rebound from a low of $4.95 in November. Its stock rose as high as $19.68 Jan. 6.

On Jan. 12, Standard and Poor’s Ratings Services of New York announced a negative outlook for the entire life insurance sector. Hartford’s shares closed at $12.18 on Thursday.

Shares of New York-based MetLife Inc., which dipped to $16.48 in November, hit $37.41 per share Dec. 19; they closed at $25.50 Thursday.

Stocks had declined to “extreme valuation levels” in November, said Steven D. Schwartz, a Chicago-based senior vice president for equity research at Raymond James & Associates Inc. of St. Petersburg, Fla. At the time, yawning corporate-bond spreads and reports of reserves insufficient to back insurers’ guarantees drove share prices lower, he said.

Now a second wave of lower prices may be coming.

In its Jan. 12 report, S&P forecasted negative-ratings or outlook actions on several life carriers over the next six months, based on higher risk profiles in investments and liabilities.

Such news may not bode well for the insurers’ shares or their bonds, which will experience wider spreads and become unattractive to in-vestors, analysts said.

The value of the assets in insurers’ portfolios, which have been behind carriers’ woes over the last 18 months, continue to be a focus at S&P, which has tried to assess the insurers’ holdings of mortgage-backed securities.

The value of the insurers’ holdings of corporate bonds and commercial-real-estate assets also is rising to a level of concern, noted Kevin Ahern, a senior director at S&P. “Our observation is that unrealized losses have grown significantly.”

Market concerns over these possible losses make this a difficult time for even highly rated carriers to issue debt securities at reasonable prices, Mr. Ahern noted.

Andrew Kligerman, a New York-based analyst with UBS Investment Bank of Stamford, Conn., said that while carriers will feel pressure from their variable annuity guarantees and their levels of credit exposure, he believes that a handful of carriers are well-positioned from an excess capital and hedging standpoint. These include Metropolitan Life Insurance Co., Prudential Financial Inc. and Ameriprise Financial Inc.

“On the flip side, you have companies that are great business operators, like the Principal Financial Group [Inc. of Des Moines, Iowa], but have heavy weightings in commercial-mortgage-backed securities, which could put pressure on them in coming months,” Mr. Kligerman added.

Investment firms express mixed feelings about insurance company securities. While they like well-run insurers that are well-capitalized and don’t hold bad debt in their portfolios, they worry about the risk of insuring an aging population, said Laura Digan, vice president of JVB Financial Group LLC in Boca Raton, Fla.

“It has been a long time since I would touch any financial bond,” said John Sullivan, a certified financial planner at World Equity Group Inc., an Arlington Heights, Ill., firm that manages about $1 billion.

Mr. Sullivan screens for securities rated A and higher, but noted that it is hard to hold companies whose bonds are A-rated but whose share price is through the floor. Recently, he recommended that a client sell off bonds from a major insurer. The company hadn’t de-faulted on its debt securities, but its share price fell more sharply that its peers’.

E-mail Darla Mercado at [email protected].