Major insurance companies, some of which were all but left for dead at this time last year, have staged a dramatic rebound, shoring up capital and increasing profits as they look forward to 2010.
Throughout the year, large carriers have been clawing their way back into the black.
Prudential Financial Inc., for example, reported a third-quarter profit of $1.1 billion, up from a $118 million loss in the year-earlier period. A similar turnaround took place at Genworth Financial Inc., where earnings reached $45 million, compared with a $258 million loss in the third quarter of 2008.
A recovering stock market, which has increased the value of insurers' investment portfolios, also has helped carriers boost their risk-based-capital ratios through the issuance of new securities.
“Over the summer, some companies went out and accessed the capital markets through debt or equity offerings,” said Andrew Edelsberg, a vice president at A.M. Best Co.
Twelve months ago, a rebound in the insurance sector seemed unimaginable.
At this time last year, amid its other headline-grabbing woes, American International Group Inc. packed up its residential-mortgage-backed-securities portfolio and transferred it to the
Federal Reserve Bank of New York. Other carriers were hurting as they increased reserves for their variable-annuity obligations, saw a drop in life insurance sales and, in some cases, suffered
hedge fund losses in connection with the Madoff scandal.
Ratings downgrades and word that major names, including The Phoenix Cos. Inc., The Hartford Financial Services Group Inc. and Genworth had applied for federal aid through the Treasury's Capital Purchase Program compounded the anxiety among financial advisers and distributors. Genworth and Phoenix never received the assistance; The Hartford received a $3.4 billion infusion. State Farm Mutual Automobile Insurance Co. and National Life Group pulled back from selling Phoenix products, while major independent broker-dealers shied away from
AIG's offerings.
But 2009 brought relief.
Even taxpayer-supported
AIG, which reported a $99.3 billion loss in 2008 and a loss of $2.08 billion during the first quarter, is back from the brink, reporting third-quarter profits of $455 million.
AIG improvement
“There's been some improvement in the market for its investments, but they still have massive amounts of government support,” said Sean Egan, managing director of Egan Jones Ratings Co. “You hope [the improvement] becomes more tangible as time goes on.”
Questions remain regarding what units AIG will sell and what businesses it will be in over the next two to five years, according to Kyle Okita, an Egan Jones analyst.
The Hartford has turned itself around sufficiently to merit a “buy” recommendation from
UBS.
“The Hartford survived the storm, but not without having to throw a few valuables overboard,” said Andrew Kligerman, a life insurance analyst at
UBS, referring to the carrier's roster of variable annuities with living benefits.
Emerging from the crisis, The Hartford has revamped its product line, releasing a new variable annuity with a savings component to provide income.
“They've raised close to $1 billion in equity, $3.4 billion through [the Troubled Asset Relief Program], and they've tightened their variable-annuities hedging program,” said Mr. Kligerman, who believes that the company is “well-positioned over the long term; they've got decent capital and risk management.”
In the third quarter, The Hartford reported a net loss of $220 million, compared with a $2.6 billion loss in the year-earlier period.
Another carrier that Mr. Kligerman believes has turned the corner is Genworth Financial.
The carrier spun off its Canadian mortgage insurance operations last summer, raising $700 million, and raised capital through several securities offerings, including a $300 million debt issue Dec. 3.
Genworth's risk-based-capital ratio (at 370) is now above the 350 level necessary for a AA rating, Mr. Kligerman said.
“They appear to be healthy, and yet they're trading at 43% of book value,” he said. “This is a compelling name, and they're going to do well.”
For the industry as a whole, 2010 looks promising, with carriers expecting $640 billion in net premiums, up from a forecasted $623 billion in 2009, according to data from Conning Research and Consulting.
At the same time, pressure to bolster general-account reserves — to which carriers added $129 billion in 2008 and $17 billion in 2007 — has abated.
“If markets continue to perform at their current pace, any needed reserve increases will not be substantial,” Mr. Edelsberg said.
Not everyone is bullish. Steve Irwin of A.M. Best is cautious. warning that a double-dip
recession or an unexpected financial shock could derail the insurers' recovery.
And while carriers' exposure to commercial mortgages worries Mr. Edelsberg, any problems in that area will be “manageable,” according to Mr. Kligerman.
E-mail Darla Mercado at [email protected].
