Copyright © 2009, Greenwich Financial Management Inc., a registered investment advisor.
Following through on our recent series considering the credit quality of your life insurance policies, we should note the announcement of federal assistance in this sector. As expected, the Troubled Asset Relief Program (TARP) bailout program will be extended to a group of US insurance companies. The Treasury Department required that any insurance company applicants have a regulated banking subsidiary; most large carriers have such an entity, but this connection with banking is arguably just a fig leaf to cover further mission creep for TARP.
The government has tentatively approved six carriers for potential TARP assistance:
- Ameriprise Financial (ticker: “AMP,” formerly known as American Express Financial Advisors),
- Prudential Financial (“PRU”)
- Allstate (“ALL”) (primarily a property and casualty insurer)
- Hartford Financial (“HIG”)
- Lincoln Financial (“LNC”)
- Principal Financial Group (“PFG”)
Accepting TARP funding has its disadvantages. First, as with the banks, the act of applying for and accepting TARP funds, especially if sizable, highlights the very financial distress it is meant to alleviate. Second, attendant federal oversight can preoccupy management at the expense of other pressing priorities. Third, although insurance companies are not known particularly for sky-high compensation packages, the government would certainly frown on what it considers excessive management pay. In some cases, TARP oversight might lessen the ability of a company to attract or retain top talent. (This is a main reason why financial institutions like Goldman Sachs have been racing to repay their TARP funds. From a taxpayer viewpoint, this is just fine.) Finally, the government may not be willing to accept the future repayment of TARP funds without the recipient first raising substantial capital in the stock market, which would create percentage dilution of existing shareholders (although recapitalization with fresh stock may be both necessary and inevitable regardless).
Some of the insurers are hesitant to accept government help. Ameriprise said it won’t, while Prudential said it is considering its options. On the other hand, Lincoln Financial’s CEO, Dennis Glass, said that they “appreciate…preliminary approval for inclusion” and Allstate’s CEO, Thomas Wilson called the Treasury announcement “a positive and proactive step [that] recognizes the integral role that insurance companies play in our economy.” Source: Fortune Magazine, article by Colin Barr- May. 15, 2009.
Some of the financial problems facing insurance companies are directly related to the current financial crisis. The absence of liquidity impedes the routine refinancing of corporate bonds and even short-term obligations like commercial paper. The purchase of new or additional insurance coverage is also a discretionary expenditure that many strapped consumers will defer. Then too, as part of this vicious circle, the declining credit ratings of many insurance companies on their long-term debt raise the costs of borrowing and decrease access. Other problems preceded the current crisis. One is over-capacity: there are too many insurance companies. Another is the practice of issuing or investing in complex derivative instruments that are difficult to value or hedge, a la AIG. A third is the burdensome patchwork of regulation, which makes introduction of new products and revision of existing products an expensive 50 state process. As fallout from the current crisis, I expect a shakedown in the insurance industry, with many mergers and acquisitions. I also expect increased pressure to move away from state and toward federal regulation, possibly by the SEC.
Note: Clients advised by Greenwich Financial Management Inc. may hold long or short positions in securities mentioned in this article or in derivatives of those securities. The author of this report has no personal holdings or interest in the referenced investments and has received no compensation for providing the above research from any of the listed companies. The information is not sufficient by itself to make an investment decision. The suitability of such investments for particular individuals has not been assessed.
Andrew Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment advisor. Questions call 917-796-8500 or e-mail Szabo@GreenwichFinancial.com). For more information, please visit http://greenwichfinancial.com/.
