SC-INSURANCE-Bailout
Extending a lifeline to what had long been some of the nation’s most prudently managed firms, the Treasury Department has decided to make ordinary life insurance companies eligible for federal bailouts.
The expansion marks another sign that the economic crisis plaguing the nation and the world has spread to the seemingly safest corners of the financial system.
Treasury officials said Wednesday that they were reviewing applications for help from such bedrock institutions as Hartford Financial Services Group Inc., Lincoln National Corp. and Prudential Financial Inc. as they sought to qualify for a share of what remained in the $700-billion Troubled Asset Relief Program created by Congress last year.
What makes the traditional insurance companies’ appeal for federal aid remarkable is that, unlike insurance giant American International Group Inc., which was undone initially by high-risk activities unrelated to its insurance businesses, these old-line life insurers appear to have wandered onto shaky ground merely by conducting business as usual.
As large investors in steady, long-term assets such as corporate bonds and commercial real estate, life insurers have historically been cushioned against passing ups and downs in financial markets. But the current crisis is so broad and deep that it has undermined even their balance sheets.
Steven Schwartz, an insurance industry analyst with Raymond James & Associates, said the industry was by no means as troubled as the banks, investment firms and auto companies that were set to consume billions in federal bailout money.
“But there are valid concerns” about the health of life insurance companies, he said. “Where things go from here is anybody’s guess.”
Because life insurance companies play a crucial role in the financial system as massive buyers of corporate debt and commercial real estate, they have come under pressure on a number of fronts since the financial crisis began, Schwartz said.
To accumulate the funds they need to pay out death benefits, they usually invest client premiums in these relatively conservative long-term assets. The idea is to match the long-term nature of life insurance contracts with steady long-term assets that pay out over time.
But as the credit crisis took its toll on markets of all kinds, insurers were battered. For example, sagging values in the investment portfolios that back up their variable annuity contracts mean the life insurers are having trouble meeting various guaranteed payouts to customers. That has cut into the companies’ earnings.
They also must raise the reserves needed to meet regulatory capital requirements.
Another example is what’s known in the industry as credit migration. Insurance companies maintain capital reserves based on the credit ratings of the assets in their portfolios, Schwartz said. As the ratings agencies clip the rating on a company’s debt from AAA to AA to A, the insurer holding that bond has to boost its capital reserves to reflect the increased risk.
Life insurers also have suffered from the frozen credit market.
Lincoln National, for instance, had to use its own capital to retire $500 million in debt this week. It plans to use $200 million more to repay commercial paper as it comes due over the next several weeks. That’s money Lincoln might have saved in a more friendly lending environment because it could have refinanced the debt.
How much TARP money the life insurers will need was not clear from their disclosures. But Hartford said in November that it figured it was eligible to receive $1.1 billion to $3.4 billion under Treasury guidelines.
Treasury spokesman Andrew Williams said the life insurers would have to wait in line with other applicants for bailout funds. They “are among the hundreds of financial institutions in the . . . pipeline that will be reviewed and funded as appropriate on a rolling basis,” he said.
TARP funds are running thin. The life insurers and other financial institutions are tapping a $218-billion subset of TARP called the Capital Purchase Program, and $199 billion of that is spoken for already, Treasury numbers show.
Officials could move more funds into the program. But after allocating $75 billion to $100 billion of TARP funds for the government’s public-private toxic-asset purchase program, there is about $100 billion to $110 billion left in the original $700-billion TARP fund, Moody’s Economy.com estimates.
--
