Citigroup sent ACE Limited stock plummeting yesterday after Citi Investment Research said it was downgrading shares to hold status and lowering its earnings per share expectations.
The move sent the Bermuda-based insurer's stock on the New York Stock Exchange down 19.76 percent to close at $40.45 per share, down from $50.41 as the Dow Jones Industrial average fell 427.47 points
Its action came, Citigroup said, after ACE's disclosure that its exposures from premiums and claims from variable annuity contracts reinsuring Guaranteed Minimum Death Benefits (GMDB and Guaranteed Minimum Income Benefits (GMIB) "increased dramatically over the past nine months."
Citigroup said while losses are limited to a maximum per year loss cap, there was a concern because of the number of policies involved, mortality rates, market performance and insureds' decisions to annuitize.
According to the bank's analysts, losses of $100 million to $130 million a year are possible.
ACE reacted with a statement that while the Net Amount at Risk (NAR) associated with its death benefit variable annuities was $6.5 billion at Sept 30, the NAR is a metric indicating total exposure if all covered individuals were to die and "such a scenario is obviously extremely unlikely and no company assumes this event will ever happen."
The company said its financial 10k filing with the Securities and Exchange Commission "clearly indicates that the variable annuity reinsurance business has no cash flow or liquidity concerns." As of Sept. 30 ACE said it expected to earn between $150 million and $200 million operating income from the variable annuities line in 2009.
Citi said it was adjusting its ACE earnings per share projections downwards to $7.75 for 2008, $6.95 for 2009, and $7.50 for 2010.
The company said it was increasing the stock risk rating to High and lowering target price to $54.
ACE dealings in GMDB and GMIB has made the insurer a "defacto put seller," Citi said, and "The contracts ACE has engaged will cost it, should the markets decline in an unexpected and extended way."
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