Stocks of insurers fall as investment values drop.

Stocks of insurers fall as investment values drop

Westside-based Broad Inc., the $9.87-billion-in-assets life insurer that split off from Kaufman and Broad in 1989, hit bottom on Wall Street last week amid investor fears that its investment portfolio, which includes real estate and junk bonds, might be sinking in value.

Broad's stock fell to $4.88 a share last week, down 60 percent from its 52-week high of $12.25.

Also down was First Capital Holding Inc., the Century City-based parent of First Capital Life and Fidelity Bankers. The stock hit a new 52-week low of $1.75 on Sept. 27, down 88 percent from a 52-week high of $14.63.

Feeding investor fears was a report by Minneapolis-based IDS Financial Services which suggested that many insurers had troubled protfolios, full of investments in doggy assets like certain real estate and junk bonds.

The IDS study was cited extensively in the Oct. 1 issue of the national financial publication "Barron's."

Insurance industry supporters last week said they hated the article.

"The drop was largely, if not entirely, due to the article on Saturday in Barron's," said Chuck Ronson, an analyst at New York-based Baird, Patrick & Co.

Another analyst agreed. "Any life insurance company that hints of problems and investors jump ship," said Margeret Alexandre, an analyst at Salomon Bros. in New York. "My sense is that there has been a loss of confidence."

The IDS study said that as many as 20 to 34 of the 100 largest life insurance companies could fail in a big recession or bear market.

The study said Sun Life of America, Broad's insurance subsidiary, and First Capital Holdings owned a lot of junk bonds.

Fidelity Capital Life was ranked third and Fidelity Bankers was ranked fourth in a list of life insurers with the largest percent of invested assets in junks bonds, with 20.2 percent and 18.3 percent of invested assets in junk bonds. Sun Life of America was ranked ninth, with 9.6 percent of its assets in junk bonds.

A First Capital Holdings official conceded the Barron's article was statistically accurate, but said last week that not enough attention has been paid to the distinctions between good and bad junk investments.

"Our concentration has been in (less-risky, non-investment grade) BB bonds, not in CCC bonds," said Robert Weingarten, chairman and chief executive of First Capital. "The press has skewed all reporting to one risk class and has no regard for how it has done in that risk class and how it fits into the overall financial picture."

One analyst supported Weingarten. "I think their junk bond portfolio is very well-diversified and is concentrated in higher-end senior notes and bank participations where the default rates and recovery levels will be acceptable," said Art Zimmer, analyst with Hanifen, Imhoff Management Co. in Denver.

Despite relatively benign quarterly income numbers for Broad Inc. and First Capital, critics said that GAAP (Generally Accepted Accounting Principles) accounting fails to accurately state the declining values in a variety of invested assets -- including junk bonds, goodwill, bank debt, highly leveraged transaction loans, stock warrants, mortgage loans -- that form the reserves of life insurers against policy claims.

"By not recognizing the deterioration of your assets, of course you can make your quarterlies look good," said Fritz Garrecht, chief research analyst of New York-based First Long Island Securities, a short-trading outfit. Broad Inc.'s net increased 17 percent to $10.7 million for the quarter ending June 30, compared to the year-earlier period, and its net operating income rose 63 percent to $15.8 million.