By Juan Lagorio and Bill Rigby
NEW YORK (Reuters) - PRUDENTIAL (PRU.LO)Financial Inc
The second-largest U.S. life insurer said on Thursday that third-quarter profit would be cut sharply by losses on poorly performing annuity and investment products and a charge for a legal settlement.
That followed recent profit warnings at U.S. life and property insurer Hartford Financial Services Group Inc
The latter sold new shares at a discount on Wednesday to bolster its capital, raising $2 billion, while Hartford earlier this week received a $2.5 billion capital injection from Allianz SE
"Insurers made big investments in mortgage-related securities and are also big holders of stocks and bonds in financial firms that have been wiped out or badly damaged by the credit crisis, such as Lehman Brothers and Washington Mutual, said Alan Rambaldini, a life insurance analyst at investment research firm Morningstar.
"On top of that, bigger life insurers like Prudential get fees on the size of stock investments behind annuity products they sell to customers, which will drop sharply as the broader market plummets," he said.
'TRADING ON FEAR'
Among other life insurers, Lincoln National Corp
Life insurance, as measured by the sectoral S&P Life & Health Insurance index <.GSPLIFE>, was down 17 percent, making it the second-worst performing sector after automakers.
Even beyond life, XL Capital Inc
"The group (insurers) are trading on fear right now," said Bret Howlett, Standard & Poor's life insurance analyst. "A lot of investors are worried about capital positions in this unfavorable operating environment.
"People are worried about whether these companies are going to need to raise additional capital. In this environment, it's going to be difficult to raise that capital."
American International Group Inc
AIG, once the world's largest insurer, got an $85 billion loan from the government three weeks ago when it was on the brink of collapse. Under the new plan, the Federal Reserve Bank of New York will take up to $37.8 billion in investment-grade, fixed-income securities from AIG in exchange for cash.
"The government has effectively provided them support for $110 billion. I think they have exhausted that avenue and so I think as they move forward their options have diminished," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.
UNDER PRESSURE
Citing market volatility and extraordinary events affecting financial markets, Prudential has suspended all purchases of its own stock.
It said it has liquidity to meet requirements at the parent company and at all operating subsidiaries and, unless it enters into any strategic deals, its need to access the capital markets before the end of the year would be modest.
"We are comfortable with our risk profile and believe that we are in a strong position to manage through the current environment," said Prudential Chief Executive John Strangfeld, in a statement.
Prudential did not say when it would report third-quarter earnings.
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.
Keeping high ratings is essential for insurers because lower ratings can mean higher costs and, in some cases, even a loss of business.
(Editing by Toni Reinhold and Andre Grenon)
