Life insurance stocks continued to rise Monday on news out last week that some companies in the struggling industry may get help—in the form of TARP money—from the Treasury Department. The Treasury made its announcement last Wednesday, sending life insurance stocks soaring the following day. The Treasury is now reviewing applications for aid from insurers including Hartford Financial Services Group Inc., Lincoln National Corp. and Prudential Financial Inc from the $700 billion bailout program.
When the Troubled Asset Relief Program became available last October, insurance companies (and for that matter, any institutions that were not banks) were not eligible for the funds. Since then, the Treasury has extended the aid to other sectors strapped for cash—including the automotive industry.
That said, life insurers were told at the time that they could apply for TARP money if they had some sort of federally regulated affiliate. (The life insurance industry is regulated by the individual states they do business in; and not by a federal authority like most other financial institutions. For more on insurance regulation, click here.) In response, some insurance companies, including Lincoln National Corp. and Hartford Financial Services Group,bought savings and loan thrifts or banks to obtain federal charters. Under the Treasury’s current review of aid applications from insurance companies, this requirement remains in force: Only insurers with federally regulated affiliates are being considered.
In the past year, life insurance stocks have dropped around 50 percent in price according to data on 29 companies from Google finance, compared with a 36 percent drop on the S&P 500 in the same period. “As I look at the industry today, it’s certainly under pressure. Driving the pressure are the losses on investment portfolios and variable annuity guaranties,” says Citigroup analyst, Coline Devine.
TARP money could give industry a much needed boost. Life insurance companies are in a bind for a number of reasons. For starters, their investment portfolios have been decimated along with the market. Insurers invest the money they collect on premiums and annuities and invest it in corporate bonds, municipal bonds, real estate, equities mortgage and other asset backed securities. Further, insurance firms that sold variable annuities with minimum guarantee benefits are still on the hook for those payments even while their portfolios—which help fund the annuity payments—are in the toilet.
Not only are they having to shore up capital as their portfolios sink, but they’re also facing credit downgrades from rating agencies like A.M. Best. In 2008, downgrades in the life sector outpaced upgrades by a wide margin, with 31 downgrades for life insurers and just eight upgrades, according to the agency. “TARP funds would definitely help out the life insurance companies. Getting money from the government is cheaper than getting it from any other source,” says Alan Rambaldini, an equity analyst at Morningstar.
Now it’s up to the Treasury to decide which insurance companies will be approved for TARP funds. "There are a number of life insurers that have met requirements for the Capital Purchase Program because of their bank holding company status," Treasury spokesman Andrew Williams told Reuters. "These are among the hundreds of financial institutions in the CPP pipeline that will be reviewed and funded as appropriate on a rolling basis."
Just last week, an application for TARP funds submitted last year by Genworth Financial, the life and mortgage insurer, was rejected by the U.S. Treasury. The deadline for approval by the Office of Thrift Supervision (OTS) of Genworth’s application to become a savings and loan holding company passed before the OTS completed its review of the company’s application, according to Genworth. The Treasury’s decision “signals a lack of confidence, and I think people are going to see this and realize that they don’t have many options left,” Rambaldini told Bloomberg News.