Although life insurers may be able to get a federal lifeline through the Troubled Asset Relief Program, it remains to be seen whether the money would be enough to help carriers survive mounting losses and decreased financial flexibility.
The tantalizing prospect of receiving bailout cash is occurring at a time when many insurers are finding their traditional avenues to capital blocked off.
"The life insurers are in a box; they can't raise money easily in capital markets, and their cash flow is insufficient," said Sean J. Egan, founding principal at Egan-Jones Ratings Co., a Haverford, Pa.-based ratings firm. "It begs the question of the amount and timing of support they get from the U.S."
IN LIMBO
Insurance companies' plans have been on hold since last fall, when about a dozen applied for federal aid through the TARP Capital Purchase Program. In order to qualify for aid, the insurers needed to have a bank or thrift, and several major carriers made deals to acquire smaller banks.
In the nearly six months since the insurers have applied for aid, share prices have taken a nose dive, earnings reports have been a pool of red ink and ratings downgrades have pummeled them.
The credit ratings of several major carriers are now just one notch above the junk category, including The Hartford (Conn.) Financial Services Group Inc. and Genworth Financial Inc. of Richmond, Va.
Genworth said last week that it will not be able to participate in TARP at this time.
New York-based Moody's Invest-ors Service cut its senior-debt credit rating on Hartford to Baa3, from Baa1, and on Genworth to Baa3, from Baa1, two weeks ago.
What's worse, Hartford's insurer financial-strength rating stands at A3. If it drops one notch, to Baa1, the company could have to post collateral on derivatives contracts, which could effect the company's liquidity, according to a filing with the Securities and Exchange Commission.
After months of delays, a decision is expected any day on whether the insurers will receive bailout funds from TARP. Analysts predict that insurers could receive between $9 billion and $18.5 billion in aid to shore up capital and avert more ratings downgrades.
Therese M. Vaughan, president and chief executive of the National Association of Insurance Commissioners in Kansas City, Mo., said that she doesn't know the basis on which the Department of the Treasury would select the companies for aid and whether the carriers would face limits on how they use the federal cash.
Strong carriers such as MetLife Inc. of New York could use the money for mergers and acquisitions, according to Steven Schwartz, an analyst at Raymond James and Associates Inc. in St. Petersburg, Fla. But that option wouldn't be likely for Lincoln National Corp. of Radnor, Pa., or Prudential Financial Inc. of Newark, N.J., which would be likely to use the money to bolster their capital, he said.
As with the banks, there is controversy over whether using bailout funds to make acquisitions is adhering to the government's intentions for the money.
Some regulators also think that life insurers that participate in TARP would be given additional flexibility, allowing them to raise more money through investments.
"If the companies get a little more capital cushion, then that contributes to confidence and gives them some flexibility," Ms. Vaughan said.
SEEKING CONFIDENCE
"They can feel comfortable offering securities, and there can be multiple options for raising capital, if there is confidence in the company," she said. "The extent to which the [Capital Purchase Program] contributes to these companies, part of it may be demonstrating that the company isn't going to have these liquidity issues."
In Lincoln's case, the money could replace capital the carrier used when it collected $400 million in ordinary cash dividends from its Hartford, Conn.-based subsidiary, The Lincoln National Life Insurance Co., in order to help pay down a maturing $500 million debt.
Ordinary dividends are normally distributed as 10% of a carrier's surplus or the net gain from the insurer's operations for the previous 12 months. Extraordinary dividends, which exceed this allotted amount, require prior approval from state insurance regulators.
However, the economic havoc could also hurt a subsidiary's abilities to provide dividends, and state regulators could deny companies extraordinary dividends if they are nervous about the effect on consumers.
"For Lincoln, that's $400 million that went to pay off holding-company debt that would have otherwise been there to support policyholders," Mr. Schwartz said. He added that the insurer might not have had to use those dividends if it had received federal aid.
OTHER AVENUES
In the event that carriers receive less than they had hoped from TARP, other opportunities for capital relief still exist, though they may be hard for insurers to find. For example, if a carrier had a maturing debt, it could refinance it, perhaps through commercial-paper offerings.
"We're aware of some Prime-2 debt [one notch below the highest rating] that's still being rolled in the commercial-paper markets," said Joel Levine, senior vice president at Moody's. "So while I wouldn't characterize the debt capital markets as exactly normal or favorable, there's an opportunity for some paper to roll."
Committed bank facilities or lines of credit at the holding-company level can also help cover expenses. But this may not be ideal, because the bank would have to be repaid, and lending agreements would be skewed in the lender's favor, Mr. Levine said.
"If the bank line agreement has three or four years left in it, a lot can happen in that time, and you'd expect the markets to unfreeze before that," he said. "It buys the company time to manage itself, as opposed to a facility that matures in 12 months, which isn't of any use and you're in the danger zone."
Although analysts think that the insurer bailout is highly likely, some assert that the help won't come without considerable pushback and that could affect the amount of aid carriers receive.
"The taxpayers are in bailout fatigue," Mr. Egan said. "From their perspective, what happened at [American International Group Inc. of New York] is sickening. 'Why should the money be used to bail out companies that have done a poor job of managing risk?'"
E-mail Darla Mercado at [email protected].
