The comment stoked investor concerns, already heightened by worries that insurers will be hit by investment losses, and high exposure to recent corporate collapses, including American International Group <AIG.N>, Lehman Brothers <LEHMQ.PK>, Washington Mutual <WAMUQ.PK>, and to commercial and residential real estate debt.
Senate Majority Leader Harry Reid, a Nevada Democrat, speaking to reporters on Wednesday, said it was imperative the $700 billion federal financial bailout get legislative approval, adding that an insurer's solvency could be threatened if financial markets remained volatile.
"One of the individuals in the caucus today talked about a major insurance company -- a major insurance company -- one with a name that everyone knows that's on the verge of going bankrupt. That's what this is all about," said Reid, without identifying the company.
A spokesman for Reid said on Thursday that the Senator was not personally aware of any particular company being on the verge of bankruptcy, nor had he talked to any insurance company officials.
"Rather, his comments were meant to refer to the conditions in the financial sector generally. He regrets any confusion his comments may have caused," said spokesman Jim Manley.
Nevertheless, the S&P Insurance Index <.GSPINSC>, a broad insurance index, was down more than 7 percent, in afternoon trading.
Hartford Financial Services Group Inc <HIG.N>, a large life and property insurer, MetLife Inc <MET.N>, the largest U.S. life insurer, and Principal Financial Group <PFG.N>, a large life and health insurer, were the index's top drags. All three were off by 15 percent or more.
The cost of protecting insurers' debt with credit default swaps also rose. And options volatility was high, indicating investors expect some large swings in share price. Buyers of puts, that guarantee the right to sell at a specified price by a certain date, focused on MetLife.
Still, analysts said none in the sector were in danger of collapse.
"They're just going to have horrible quarters and big write-downs, but it's not going to cause a solvency issue; it's going to cause an earnings issue," said Rob Haines, analyst at independent research service CreditSights.
Alan Rambaldini, an analyst with Morningstar, said investors were concerned life insurers would have to book higher costs in their variable annuities businesses because of market turmoil.
"People are worried about that in combination with the investment losses they've taken on Lehman and AIG, and Fannie, Freddie," he said, "and that they'll have to raise capital in order to keep their ratings with the rating agencies at the current level."
Sen. Reid's comment prompted MetLife to issue a statement saying it was "financially sound" and not the insurer that the Senator had referred to.
MetLife added that it had "high ratings from all of the major insurance ratings agencies" and was "fully able to meet all its obligations."
On Wednesday, Hartford, in a statement, said it was "disappointed" in its recent stock performance which it put down to "unprecedented market conditions." But the insurer added it had a "strong history of managing through challenging times."
Hartford's ratings are under threat of downgrade by both Moody's and Fitch, raising concerns that it will have to boost capital to address rating agency concerns.
(Reporting by Lilla Zuill in New York; Additional reporting by Juan Lagorio and Dena Aubin in New York, Richard Cowan in Washington; Editing by Tim Dobbyn)