The banking system has been crumbling for over a year, but last month's collapse of American International Group (NYSE: AIG) -- which prompted an $85 billion government takeover -- suggests that insurance is not immune from the problems. As a reminder, AIG got snared in the $62 trillion Credit Default Swap (CDS) market whose growth was spurred by McCain advisor, Phil "Americans are Whiners" Gramm.
And as insurance crumbles, banks keep suffering. Bank of America (NYSE: BAC) and National City Corp. (NYSE: NCC) are both hurting. How much?
- Bank of America's earnings plunged 68% to $1.18 billion, or $0.15/share -- missing by 60% analysts' forecast of 62 cents. Bank of America will raise capital by selling $10 billion of common stock and slashing its dividend in half from 64 cents to 32 cents. One analyst cut the bank's 2009 earnings estimate to $2.50 per share from $3 per share -- this is well below the $3.12 per share from a Thomson Reuters analyst poll -- and lowered his price target by $2 to $26.
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National City Corp. and its National City Bank both suffered debt downgrades from Fitch. For instance, Fitch slashed the bank subsidiary's long and short-term Issuer Default Ratings (IDR) to A- from A. And it lowered the bank and holding company's Individual rating to C from B.
The banking problems have been more apparent than the ones on the insurance industry. But yesterday, the problems there became more apparent. That's when Hartford Financial Services Group (NYSE: HIG) -- which expects to lose $8.50-$8.80 in the third quarter -- got a $2.5 billion capital investment from Allianz SE. "Allianz will buy, at $31 per share, $750 million of preferred shares convertible to common stock after receipt of applicable approvals, $1.75 billion of 10% junior subordinated debentures," according to BusinessWeek.
Why is insurance in trouble? Well, it probably didn't help that Senator Harry Reid remarked last week on a rumor than an un-named insurer was on the verge of bankruptcy. But Hartford -- whose stock lost half its value last week -- has made bad investments. It is expects to take a $2.1 billion to $2.2 billion capital loss in the third quarter from investments in Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and Lehman Brothers Holdings Inc.
And that's the thing about insurance -- it generates huge amounts of cash from premiums which are then invested. What looked safe a year ago is toxic today. So don't be surprised to see more insurers taking these big investment losses.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns AIG securities and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 1)
10-07-2008 @ 1:11PM
Sheldon L said...
Chubb and Met will eat everyone elses lunch.
10-17-2008 @ 2:39PM
Insurance said...
Very interesting article. Sometimes insurance can be a little confusing. It's good to have as much information as possible, and this article was very helpful.