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.
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.
Within 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.