Months ago, Citigroup (C) and Merrill Lynch (MER) kicked off what has now become a worldwide deluge of writedowns on mortgage and credit-related assets. It was believed at the time that losses would be limited to those securities tied to risky mortgage debt. This viewpoint has been proven false.
Now, as the credit crisis spills over into markets once believed to be virtually risk free, even conservative financial institutions are feeling the pinch.
The New York Times is reporting the insurance industry may be the next to see years of consolidations packed into a few short months.
Everyone knows about the troubles at American International Group (AIG), the world's largest insurer, which is now owned by Joe and Jill Six-pack (thank you, Governor Palin, for re-introducing this archetype to the lexicon). But it was believed that AIG was an insolated incident, that its unique exposure to the treacherous credit default swap market sealed its fate.
Troubling action yesterday in other larger insurers is turning that supposition on its head.
Prudential Insurance (PRU) fell more than 30% after warning profits would slump and indicating it may need to raise capital. Lincoln National (LNC) tumbled 35%, Principal Financial (PFG) lost 27% and Unum Group (UNM) dropped 30% in other southward moves within the industry. The group as a whole fell almost 17%, making it the second worst performing sector behind the automakers.
Analysts now fear mounting losses may force weaker hands to fold, as stronger firms gobble up smaller, less buoyant ones. Just as Wells Fargo (WFC) ultimately won out over Citi in the battle for Wachovia (WB), insurers with stronger balance sheets and more fervent risk aversion are likely to rise to the top.
It wasn't supposed to be like this.
Insurance companies, long believed to be safe and boring behemoths slothing their way through the dizzying world of highly rated debt, have been roiled by unprecedented dislocation in the credit markets. Taking in millions of tiny premiums each month, insurers invest that money in (supposedly) safe securities yielding low, but steady returns. The hope is that incoming cash flow offsets payouts on claims - and the firm gets to keep what's in the middle.
The Times notes that even as investment-grade debt has fallen in value this year, insurance companies have been loathe to write down their losses, hoping instead their investments would rise before year's end. But now that rolling over short-term funding is next to impossible, other assets must be sold to raise cash. Real losses on these sales are taking a toll.
Washington has its hands full trying to prop up the banking system, which sinks deeper into the abyss seemingly by the hour.
It's too early to know whether the insurance industry will be next in line for a government handout, but if the credit markets don't start to improve in short order, the queue in front of the Treasury Department's door could get a lot longer.
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