As the gamesmanship surrounding life
insurance participation in the US Treasury Department’s Troubled
Asset Relief Program (TARP) continues, some answers are finally
falling into place as a wary Wall Street looks on.
As the banking industry accepted billions in
government bailout funds last autumn, life insurers aggressively
lobbied for their own piece of the federal aid, worried about their
balance sheets, which had been saddled by hefty investment losses
from the declines in the stock market.
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But the government was slow to approve the
requests. Subsequently, the stocks of most public insurance
companies have fallen sharply in recent months.
The delay might well have been a hidden
blessing, however, as the insurers watched as US banks have
struggled with the oversight and compensation restrictions
attendant to government bailout money.
There are disincentives to accepting federal
rescue money, such as mandatory federal ownership of preferred
shares of the recipient company, limits on executive compensation,
a ban on golden parachutes and stricter rules on salary-related tax
deductions.
Finally, on 14 May the US Treasury Department
announced that six US life insurers have been granted preliminary
approval to receive funding under TARP's Capital Purchase
Program: Allstate, Ameriprise, The Hartford, Lincoln Financial,
Principal Financial, and Prudential Financial.
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By GlobalDataWithin a week of the announcement, first
Ameriprise, then Allstate bowed out of the TARP programme.
“We applaud the administration’s decision to
include insurers in the US Treasury’s programs. Given Allstate’s
strong capital and liquidity positions, however, we will not
participate in this program,” said Allstate chairman, president and
CEO Thomas Wilson in a statement announcing its decision to forgo
the funding.
The Northbrook, Illinois-based based insurer
said that at the end of the first quarter it had $12.2 billion in
Generally Accepted Accounting Principles-based equity and $23.1
billion in cash or highly liquid assets in its investment
portfolio, sums that were achieved from taking steps that included
suspending a share repurchase programme and reducing operating
costs.
Since the end of the first quarter, the
company also completed a $1 billion debt offering and reported an
improvement in its securities portfolio of more than $1.5 billion
as of 13 May.
The Hartford Financial Services Group said
that it had been notified by the Treasury that it was eligible for
$3.4 billion from the TARP programme. Lincoln National said it has
been initially cleared for a $2.5 billion capital injection.
As for the other insurers still playing the
TARP game, it is unclear whether Principal Financial or Prudential
Financial will accept any TARP funds.
Jeffrey Schuman of New York-based stock
broking firm Keefe, Bruyette & Woods, writing in a research
note, predicted Principal Financial and Prudential Financial are
unlikely to take TARP funds.
Like Ameriprise and Allstate, Principal
Financial has a solid capital position, he wrote. But, he said,
Prudential's case is harder to assess because it has some
vulnerabilities that might make the TARP funds worth
considering.
Schuman predicted that both The Hartford
Financial Group and Lincoln National would accept the money,
although the two companies said their decision hinges on final
terms of the deal.
The two companies will accept the cash, he
said, “given what we believe is a need for additional capital and
the cost and difficulty of potential equity raises at their modest
valuations.”
Industry officials uniformly welcomed the news
that life insurers would be eligible for funding.
Frank Keating, president and CEO of the
American Council of Life Insurers (ACLI), said that the ACLI was
pleased by the Treasury’s decision.
“Treasury’s reported decision reflects the
important role the life insurance industry plays in the lives of 75
million American families, in the financial services system and in
the national economy,” Keating said.
“The reported decision also helps fulfil
Congress’s intent to extend credit to financial institutions, such
as life insurers, to boost the flow of capital into the economy. By
extending funds to certain insurers, Treasury is taking the right
step toward helping restore lending and liquidity to the
marketplace.”
Ratings agency Fitch said that it believes
that TARP eligibility enhances near-term financial flexibility in a
period of challenging capital markets access, and could ultimately
help stabilise ratings.
“The effect on any individual
insurer's ratings following the receipt of TARP funds will
be determined on a case-by-case basis,” the ratings agency
said.
“A key consideration for Fitch will include
the insurers’ intended uses of any new capital following receipt of
the TARP funds, the amount, form and terms, as well as the ability
to service the additional debt.”
Rating agency Moody’s was even more
enthusiastic about insurer involvement in the TARP program, issuing
a report that TARP money has the potential to materially increase
companies’ capital reserves and give them more financial
flexibility.
The Moody’s report said that despite the
stigma attached to obtaining government assistance, Moody’s
believes that TARP would be beneficial to creditors because it
provides critical capital buffers and/or financial flexibility.
“We expect companies that have been approved
for TARP to make the decision whether or not to participate on the
basis of their needs for additional capital and liquidity, and to
consider their alternative options for addressing them on their own
without government support,” said Jean-Francois Tremblay, author of
the report.
Rating agency Standard & Poor’s also
applauded the insurance bailout in a cautious note to clients.
“Although we will analyse each insurer
participating in TARP on a case-by-case basis, we generally view
this development favourably,” noted Standard & Poor’s credit
analyst Shellie Stoddard.
For some advisers and their clients, a cloud
of suspicion hangs over the companies that applied for federal aid
amid the stock market’s fall and fear surrounding the near-collapse
of American International Group. Until the dust settles,
uncertainty reigns.
