Annuity Providers Could Be Ready to Tumble

What kind of business takes your money, gives you a guaranteed minimum return and then invests the money in complex derivative securities or crummy real estate investments? What kind of business takes your money and gives you a guaranteed level of performance, a stop out, plus some upside in the S&P 500, and then doesn't hedge but invests in the same crummy properties?

Why it is the annuity business, companies like Hartford Financial Services (HIG - commentary - Cramer's Take), Lincoln National (LNC - commentary - Cramer's Take) and Prudential (PRU - commentary - Cramer's Take). These companies, one is to believe from how they are trading, are on the wrong side of every ledger. Why "one is to believe"? Because just like every other financial insurer, they don't disclose much of anything except what they broadly do, and what they broadly do is disastrous.

These companies are at the root of so many bad days because nobody knows what happens to them if their policy holders want the money. Not only that, they don't have any new money coming in to pay the old.

When Prudential got a ratings change that eliminated a major source of commercial paper, it was obvious that the possible annuity issues are stigmatizing the company. But do you know the surest sign of impending doom? They have the media on their side saying that state regulators have everything under control and the money is segregated and there will be no problems. Sounds like Ambac (ABK - commentary - Cramer's Take), PMI (PMI - commentary - Cramer's Take), MBIA (MBI - commentary - Cramer's Take) and MGIC (MTG - commentary - Cramer's Take) to me. Everything's under control.

Look to this group to have many rocky days ahead if it turns out that they didn't hedge properly and their investments are even more sour than we thought. Just take a look at the Goldman Sachs pieces on them; they make a compelling case that things are much worse than they seem. So does the UBS piece today on commercial exposure from Hartford and Principal Financial (PFG - commentary - Cramer's Take), the company Goldman thinks is most challenged.

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