Do insurers need a bailout?

Other than AIG, many life insurers have been left to fend for themselves. Could that soon change?

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By Paul R. La Monica, editor at large

Bank stocks get all the headlines. But insurers have been whacked this year as well. The KBW Insurance Index (KIX) has fallen almost as much as the KBW Bank Index (BKX) this year.
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NEW YORK ( -- If you're an insurance company hoping for a government handout, unless your name is AIG, you've been out of luck so far.

Could that soon change? Investors are growing increasingly worried about the health of the industry, particularly life insurers that have been hit hard by concerns about capital requirements and growing losses.

Insurance stocks don't get as much attention on Wall Street as the zombie banks, but they have done almost as poorly. While the KBW Bank index has plunged about 55% so far this year, the KBW Insurance Index isn't far behind, down 44%.

Last week, ratings agency Standard & Poor's downgraded the credit and financial strength ratings of 10 insurers, including MetLife (MET, Fortune 500), Prudential (PRU, Fortune 500) and Conseco (CNO).

So far though, banks, and not insurers, have been the major beneficiaries of bailout funding.

And with the Treasury Department disclosing last week that federal regulators have started to conduct so-called stress tests on 19 banks with more than $100 billion in assets, it seems likely that many of those banks will in fact be required to raise more funds.

But it looks like one insurance company will need to undergo a stress test. According to research from non-profit newsroom ProPublica, which released a list Thursday morning showing the 19 banks that had more than $100 billion in assets at the end of last year, MetLife ranks seventh.

It makes sense that MetLife would qualify since it does have a regulated banking unit. The company set it up in 2001.

The Treasury Department was not immediately available for comment about the list

A spokesman for MetLife also would not comment about the stress test list, but pointed out that MetLife has not received any money from the government's Troubled Asset Relief Program, or TARP.

That makes MetLife the only one of the 19 banks on the list that has yet to receive any government funding. The remaining banks on the list (seen here at the right) are the usual cast of characters of big, troubled banks.

MetLife is also the only insurance company that it is large enough to qualify for the stress test. However, given the industry's woes and recent stock price declines, it's possible that other insurers might need or want funding.

Several other insurers, including Protective Life (PL), Hartford Financial Services (HIG, Fortune 500) and Lincoln National (LNC, Fortune 500), were approved as bank holding companies earlier this year.

"Most of the insurers should be able to get by without funding. I think they have done the bank registrations more as a precaution than anything else," said Doug Ober, chairman and CEO of Adams Express (ADX), a closed-end fund that invests mainly in U.S. stocks and owns Prudential.. "But there could be some that have serious difficulties that may face short-term credit needs."

Still, it's important to point out that despite the problems facing insurers, customers should not need to worry about their policies.

The individual insurance units are regulated at the state level and there are many protections similar to those that insure bank deposits at the federal level. Even policyholders at AIG (AIG, Fortune 500) have been largely unaffected by the parent company's financial collapse.

And for the most part, the insurance companies may not be in nearly as bad shape as investors and rating agencies believe them to be. So it is probably unfair to compare them to banks.

"A lot of insurers' troubles come from their investment portfolios. That's a concern but it's not like the banks where they actually have toxic assets they can't get rid of," said Dan North, chief U.S. economist with Euler Hermes, a leading credit insurer.

North added that companies like S&P, Moody's and Fitch may now be rushing to downgrade some companies because many of them were blamed for not being diligent enough to spot problems before the credit markets blew up.

"The rating agencies are on tenterhooks now since some or them are thought to be part of the big problem. So they are probably being aggressive in downgrading," North said.

Ober agreed that the issue with most insurers is more one of market confidence. He does not expect other big insurers to follow the same route as AIG.

"I don't think most insurers dabbled in the collateralized debt obligations and credit default swaps that got AIG into such big trouble. My general feeing is that insurers should not end up in some death spiral," Ober said.

But try telling that to a skeptical market.

"The pace at which insurance stocks are moving down limits their options every day," said Randy Binner, an analyst with FBR Capital Markets.

So even if insurers are not in as dire shape as banks, as long as the stocks keep plunging, that will make it more difficult for them to raise needed capital.

"Will insurers be able to ride this out? I think so. I hope so. But it would be nice to have more capital," said Steven Schwartz, an insurance analyst with Raymond James.

Update: China giveth and China taketh away. Much of Wednesday's market rally appeared pinned to hopes that China would increase the size of its stimulus package today. That didn't happen.

I don't think this means that China won't eventually boost investments geared toward infrastructure and manufacturing...and that could wind up helping the global economy. But clearly, investors are disappointed that China didn't make it official. To top of page

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