Cramer: Tough Love for Insurance Companies


February is supposed to be a romantic month, but for the big insurance companies, it was particularly harsh. The ratings agency Standard & Poor’s downgraded 10—count ’em—10 insurance companies last week. That means that the people who study such things are worried about how much cash your annuity insurer has on hand to pay you.

Now, I’m no alarmist and I think you’ll be fine, if you’re one of those annuity holders. But it pays to be prudent, so knowing your insurer’s financial picture is a smart move.

Hey, after all, Cramer Nation is all about smart financial moves.

So what’s with the down grades? Here’s what we know:

On February 26, Standard & Poor’s slashed its ratings on a slew of U.S. life insurance companies, inferring that the insurers had taken a beating in the financial markets and were hemorrhaging cash at an alarming rate. In insurance speak, S & P lowered its counterparty credit and financial strength ratings on 10 groups of U.S. life insurers, and its counterparty credit ratings on seven U.S. life insurance holding companies.

“The pressures within the life sector have been building,” S&P said in a statement. “Given the disarray in the credit and capital markets, most insurers’ financial flexibility has decreased in the past six months.”

Like I said, even S&P didn’t want to alarm the public and scare consumers. The ratings agent took pains not to paint too negative a picture, saying, "Although today's rating actions reflect our opinion of a general decline in the overall credit worthiness of the U.S. life insurance sector, we continue to believe the credit fundamentals of the life insurance industry are strong."

Here’s a list of the insurance companies downgraded by S& P:

•    Conseco Inc. (Stock Quote: CNO)
•    Genworth Financial Inc. (Stock Quote: GNW)
•    MetLife Inc. (Stock Quote: MET)
•    Prudential (Stock Quote: PRU)
•    Hartford Financial Services Group (Stock Quote: HIG)
•    Lincoln National (Stock Quote: LNC)
•    Protective Life Corp. (Stock Quote: PL)
•    Midland National Life Insurance
•    Pacific Life Corp
•    Security Mutual Life Insurance

Which companies represent the most risk to insurance customers?

MetLife is on the list. S&P cut the insurer’s rating to “A-minus,” the seventh-highest investment grade, according to S&P. Hartford might be another, as S&P cut its rating to “BBB-plus”, S&P’s third-lowest investment grade. Genworth saw its rating slashed by two notches to “BBB”, S&P’s second-lowest investment grade. Prudential didn’t really fare any better, it merited an “A" rating, S&P’s sixth-highest investment grade.

As I said, I’m confident that these companies have enough cash to pay off on their annuities, but not if it costs them more to borrow cash. So life is getting harder for the life insurance industry. Still, I am taking no prisoners. A few years ago, my original life insurance company merged with one of the companies on the S&P list, Genworth. I was not happy about it, but insurance companies have their own rules and I was basically sent a bill by Genworth. I was horrified to see them downgraded and even though the CEO personally assured me not to worry, I recently took out a second policy for half the money of the first one with an insurance outfit I vetted personally (Minnesota Life).  I did that because I didn't want my kids thinking, "What the heck was Dad doing? He was supposed to be so smart!" So, should you do the same thing if you have a policy with an insurer on this list? Better to be safe than sorry. I still pay my Genworth bill though, primarily because I believe the government won't let them default.

A disturbing pattern.
The life industry has been slashing dividends, laying off tens of thousands of staffers and lining up in Washington for some big-time bailout relief. The lousy economy has also done a number on insurance company assets, as the quality of corporate debt and mortgage-backed bonds has been reduced dramatically.

That goes beyond just the “Tough Luck 10” that S&P cited. For example, AIG’s problems are well documented (Stock Quote: AIG). On Monday, AIG announced a staggering $61.7 billion loss that prompted the insurance giant to ask for a $30 billion cash infusion from Uncle Sam. Traders are starting to call AIG a “black hole” and I can see why. Basically, the U.S. government, via the American taxpayer, pretty much owns AIG in the form of its interest and dividend liabilities and that’s not a pretty picture.

The worst part? Somehow I don’t think that we’ve seen the last of an AIG bailout. They’ll be back again, looking for more TARP money, unless AIG bondholders agree to take a big financial hit. Up to now, though, AIG bondholders haven’t had to because we’ve been tapped again and again to bail them out. So why would the bondholders change their tune now?

Back to the life insurance downgrades.

If you think you want to get your money out of an annuity, your best move is to get on the phone with your provider and hash it out. Historically, it hasn’t been easy for annuity holders to get good deals on flexible cash out options once they’re “locked in.” Often you’re staring big cash out fees in the face if you decide to liquidate. There is some good news here, though. A decent secondary market has sprung up for liquidating annuity payments. Ask your provider about options in the secondary market, and see if any work for you.

—Brian O’Connell contributed to this article.

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