The Wall Street Journal just noticed that the life insurance industry is in trouble. But that cow escaped the barn last fall (as I posted in October 2008 here, here, here and here) -- taking down Met Life (MET), Hartford Financial Services (HIG), and Prudential Financial (PRU). But even though the Journal is late to inform you of the problems, it doesn't mean there's not more trouble ahead for the group.

As the Journal points out, life insurer stocks have already taken a beating. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 59 percent since the beginning of the year, leaving it down 82 percent since its May 2007 all-time high. And 12 of them have applied for TARP money.

Thanks to a state-by-state regulatory system and overly optimistic accounting rules, insurers may not have sufficient capital and they most certainly are overstating the value of their huge portfolios of mortgage-backed securities and other toxic waste. For instance, MetLife, whose $380.84 billion assets make it the largest in the U.S., had $29.8 billion in unrealized losses at the end of 2008

The problem for the U.S. economy is that life insurers buy 18 percent of corporate bonds. So if they fail, those bond sellers will need to make up for a huge amount of demand. And that buying is already down. In the fourth quarter of 2008, life insurers bought a mere $3.3 billion in stocks and bonds, 63 percent less than in the third quarter.

In short, the life insurance industry is another big shoe to drop in this ongoing financial catastrophe. It's too bad that the Journal took five months to notice.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.


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