(FROM THE WALL STREET JOURNAL 8/25/15) 

The sharp decline in stocks the past three days may have scared investors, but it didn't get in the way of Merger Monday, as some speculated could happen.

On Monday, Southern Co. agreed to buy AGL Resources in an $8 billion deal that will create the second-largest utility company in the U.S. in terms of customers. The price represents a 38% premium to where AGL's shares closed on Friday.

Also on Monday, the private-equity firm Sycamore Partners agreed to take Belk Inc., a department-store chain, private in a deal valued at $3 billion, including debt.

If the rout continues, it could stem the appetite of companies to combine. Many companies have been using their stock, trading at high levels, as currency for deal making. A tumbling stock market, along with the uncertainty it creates, could cause chief executives to rethink mergers and acquisitions.

"The question in the room is whether this is the correction that everyone has anticipated or if it's a more fundamental reset. I believe it's the former, not the latter," said Bill Curtin, global head of M&A at the law firm Hogan Lovells. "If it's a correction, then corporates with strong balance sheets will plow ahead with M&A," added Mr. Curtin, who says companies could use the slump as an opportunity to snap up assets on the cheap.

Southern Co. shares closed nearly 4.9% lower on Monday. AGL shares rose 28% and stock in Belk fell by 14%.

-- Dana Mattioli

 

Life Insurers Lose Out

 

Car insurers versus life insurers? Go with the car insurers right now, say some industry analysts.

Stock and credit analysts are noting that nonlife insurers generally are better positioned to weather a stock-market rout than life insurers. But in both halves of the insurance world, analysts and investors have their focus somewhere else: the Treasury market, as the benchmark 10-year Treasury yield hovers around 2%.

"I am probably most nervous that interest rates follow markets down, and the Fed continues to delay taking rates up," said Colin Devine, a managing director at Jefferies LLC, in an interview. The ultralow interest-rate environment since the financial crisis of 2008-09 "is becoming a bigger and bigger problem," he said.

Most insurers earn substantial income from investing premiums, but life insurers typically depend more heavily on their investment portfolios than do car, home and some sorts of business insurers. That is because life insurers can collect premiums for decades before paying out a claim, as with life insurance and polices that pay for nursing-home care.

For many existing policies on life insurers' books, the companies expected to earn far-higher yields than newly invested cash fetches today. The 10-year Treasury yield peaked at 15% in the 1980s, and has generally declined since, hitting a mid-2012 low of 1.404%. The yield appeared to be edging upward and was nearly 2.5% as recently as mid-July.

Now, many investors are once again piling into Treasurys for their safety. As Treasury prices have risen, rates, which move in the opposite direction, have fallen. If they continue doing so, Mr. Devine anticipates life insurers will be taking charges against earnings to boost reserves to reflect reduced expectations for interest income.

Many consumers will also feel some pain as insurers seek to avoid losses on older blocks of business. In recent months, at least a couple of insurers have increased annual charges in certain types of life insurance as allowed by the contracts, to the dismay of the often-elderly policyholders.

Analysts note that low rates also have other ramifications, including raising the cost of running risk-management programs.

Such hedging programs are important for insurers selling income-stream guarantees with variable annuities, which are a tax-advantaged way to invest in stock funds. Over the past decade, those income-stream guarantees have been popular with many retirees.

In a note to clients, David Havens, a credit specialist with Imperial Capital LLC, compared assets and equity of the life and nonlife parts of the U.S. insurance industry. The life side had an assets/equity ratio of 9.3; the figure for the property-casualty insurers was 2.6.

If the stock-market declines were to continue, "it stands to reason that life insurers are at greater risk of asset- value erosion than P&C insurers," he wrote. "This is true on both sides of the Atlantic, and beyond."

Mr. Havens added that it isn't time to panic, because life insurers "have worked long and hard over the last several years -- particularly in Europe -- to bolster their balance sheets," and companies generally have more capital, "and a better handle on risk," than they did prior to the market slide of 2008.

Life insurers get whacked by falling stock prices in a couple of ways. In Europe, more than in the U.S., the insurers hold stocks in their investment portfolios, though there is less equity risk than several years ago, because of the toughening solvency requirements overseas, Mr. Havens said.

Indirectly, life insurers see a drop in fee income from their asset-management businesses, and falling stock markets also expose "latent risk in complex products," such as variable annuities, he said.

 

Netflix Shareholders

Endure a Jolt

 

As global markets plunged in a tumultuous day of trading Monday, Netflix Inc. was whipsawed more than most.

The streaming service's shares were even more volatile than usual. The stock went from being the worst performer in the S&P 500 index to one of the best and back down again -- at times plunging as much as 18% and rising as much as 5.5%. The shares ended the day down 6.8% to $96.88, almost on par with the declines in the day's hardest-hit sector: energy.

Netflix has long been a volatile stock, valued based on high hopes for ambitious global growth and the promise of future earnings. Even with the recent drop, Netflix shares have still almost doubled this year and trade at an eye-popping multiple of 218 times earnings.

"A lot of the performance of the stock has been a function of expectations of long-term growth," Guggenheim Securities analyst Michael Morris said of Netflix. "The weakness in the overall market reflects uncertainty about global growth prospects. Any company whose valuation is based on growth potential is going to be at a greater risk and see more impact from growth fears than others."

Netflix had been a high-flying stock this year.

Before the declines of the last three trading days, Netflix shares had increased 150% year to date, faring far better than the S&P 500's 1% gain during that time.

The company is in the midst of an aggressive push to expand abroad, with plans to provide its video streaming service in every major market by the end of 2016.

-- Nathalie Tadena

 

(END) Dow Jones Newswires

August 24, 2015 20:14 ET (00:14 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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