Insurers See Lower 3Q Income, S&P Revises Life Insurer Outlook

October 10, 2008

U.S. life insurers Lincoln National Corp. and ACE Ltd reassured investors that they have enough capital, but credit rating agency Standard & Poor’s cut its outlook for the industry on Friday.

The Progressive Corp. reported a net loss of $684.2 million in the third quarter saying September’s market turmoil hammered its investment portfolio and sent shares down 9.4 percent to $11.70.

Shares of Lincoln, battered in recent days amid fears of capital needs, were up 21 percent to $22.03 on the New York Stock Exchange, while ACE stock was up 8.9 percent to $41.66 in late afternoon trade.

The Lincoln National and Ace announcements followed recent profit warnings at U.S. life and property insurer Hartford Financial Services Group Inc., MetLife Inc. — the largest life insurer in the United States — and Prudential Financial Inc.

S&P revised its outlook for life insurers to negative from stable, based on expectations of higher-than-normal credit losses, lower fee-based revenues, and a reduced financial flexibility.

Insurers have been under pressure to keep solid capital positions to maintain their ratings after their investments lost value as financial markets sank in recent weeks.

Higher ratings lower the cost of borrowing.

“We expect to revise the ratings or outlooks on several life insurers in the next few months because of the impact of these challenging macroeconomic conditions,” S&P’s credit analyst Kevin Ahern said in a statement.

“At this time, we expect most downgrades should be one to two notches at the most,” Ahern added.

MetLife sold new shares at a discount Wednesday to bolster its capital, while Hartford earlier this week received a capital injection from Allianz SE, Europe’s biggest insurer.

LINCOLN CUTS DIVIDEND, RULES OUT CAPITAL RAISE

Philadelphia-based Lincoln, one of the largest U.S. life insurers, forecast lower-than-expected operating earnings for the third quarter, and cut its dividend in half. It allayed investors concerns about equity needs by saying it had no plans to raise capital.

“We believe our third-quarter excess capital position and the action we are taking to reduce the dividend serve to defend our strong capital base and improve our overall financial flexibility,” said Dennis Glass, Lincoln’s president and chief executive, in a statement.

The company forecast operating income, which analysts use to measure performance, between $280 million and $320 million, or $1.10 or $1.25 per diluted share, down from $352.9 million, or $1.29 a share, reported a year earlier.

Analysts expected operating income of $1.32, according to Reuters Estimates.

ACE, the largest Bermuda insurer, estimated an operating income for the third quarter of between $1.44 and $1.48 per common share, down from $692 million, or $2.06 a share, reported in the year-earlier quarter.

Analysts expected operating income of $1.40, according to Reuters Estimates.

“It was good to know (the guidance in the middle of the markets crisis), but the number was largely in line with our expectations,” said Paul Newsome, analyst of Sandler O’Neill.

Lincoln estimated net realized losses on investments and derivatives of between $140 million and $160 million, while ACE reported net realized and unrealized losses of approximately $1.5 billion.

(Reporting by Juan Lagorio, editing by Brad Dorfman)

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