Already hit hard by severe losses on their investment portfolios, insurance companies nationwide — particularly life insurers – continue to face challenges as they attempt to convince investors that their capital reserves are safe.

Fears also remain that the insurance cycle is entering a down period and increasing investment losses could cripple the insurance industry further.
“Some of what’s going on is a function of an analysis of earnings prospects versus solvency issues,” said Steven Weisbart, chief economist at the Insurance Information Institute, a New York-based industry group. “Many are seeing earnings pressures in 2009.”

The KBW Insurance Index, which includes 24 national insurance companies, is already down nearly 27 percent so far this year. It declined 48 percent to $82.23 in 2008.

Insurers, both in the life sector and property and casualty sector, have been hit hard by the financial market meltdown.

“Everybody is antsy, everybody is anxious, nobody really knows what’s happening within the financial markets, and like it or not, the insurance companies are part of the those financial markets,” said David Steuber, co-chairman of law firm Howrey LLP’s Insurance Recovery Practice Group in Los Angeles.

Earlier this month, Hartford Financial Services Group Inc. reported a loss of $806 million, or $2.71 per share, for the final three months of 2008. The loss included a $610 million realized capital loss and another $597 million loss tied to the write-off of good will.

Shares of the Hartford have fallen 39 percent this year.

Last month, property, casualty and auto insurer Allstate Corp. posted a loss of $1.13 billion for the fourth quarter as losses piled up in its investment portfolio. It was the second consecutive quarter the company reported large losses on investments that have soured amid the global credit crisis.

Life insurers appear to be getting a harder beating, as investment losses and increased reserve and capital requirements associated with companies’ variable annuity businesses continue to cause problems.

Life insurers make money by collecting premiums on policies.

In the past, companies have been able to pile up big returns by investing that cash flow in the market before they eventually have to pay out money after policyholders die or begin collecting on annuities.

Plunging stock prices and credit market disruptions are putting stress on that business model, leaving investors and analysts worried that insurers will have to dip into reserves to help meet minimum payment obligations of their policyholders.

Within the past year, insurers have been under pressure to maintain solid capital positions to avoid damaging downgrades by ratings agencies. Keeping high ratings is important for insurers because lower ratings can mean higher costs, and in some cases, even a loss of business.