The Treasury Department is considering buying equity stakes in insurance companies, a sign of how the government’s $700 billion rescue program could turn into a piggy bank for a range of beleaguered industries.The availability of U.S. government cash in the middle of a global credit squeeze is drawing requests from insurance firms, auto makers, state governments and transit agencies. While Treasury intended for the program to apply broadly, the growing requests could put a strain on the $700 billion, a sum that only last month stunned lawmakers.
MetLife Inc. and Prudential Financial Inc., two of the nation’s largest publicly traded life insurers, are interested in exploring a sale of equity stakes to the government, according to people familiar with the matter.
On Sunday, a spokesman for New York Life Insurance Co., one of the highest-rated insurers in the U.S., said, “The Treasury has asked the life-insurance industry for help in developing solutions for strengthening the financial system. We agreed to work with other industry leaders and Treasury so we could play a constructive role in helping shape this important discussion.” He said the insurer, which is mutually owned, doesn’t require additional capital and has “not made any decision to accept capital, if offered.”
In September, the government extended an $85 billion rescue loan to giant insurer American International Group Inc. in exchange for an 80% stake.
Insurers are critical to market stability. Signs of eroding confidence at life insurers could further dent fragile business and consumer confidence. Insurers are among the biggest holders of the nation’s corporate debt, with $1.3 trillion on their books. They are long-term investors, holding the securities for years, even decades.
Most insurance companies are financially sound but have seen their long-term investments and stock prices fall in value. Some have holdings of riskier alt-A and subprime-mortgage backed securities. Insurers have suffered losses in bond and preferred-stock holdings from the collapse of companies including Lehman Brothers Holdings Inc. Insurers also have been hit with billions of dollars in unrealized losses as corporate bonds of all stripes suffered big declines. Low interest rates have damped interest income and a prolonged economic slump could dent the variable-annuity business and even hurt sales of core life-insurance policies.
Insurers would normally tap capital markets to raise money. But many are loath to attempt selling common stock because their share prices have been so battered. That’s one reason many insurers have been pushing the expansion of Treasury’s equity-stake program to raise capital.
Treasury had already envisioned insurance companies using one element of its rescue program: selling bad assets, such as mortgage-backed securities, to the government. But Treasury officials are considering whether to buy equity stakes in certain firms, according to people familiar with the matter.
Under the terms of Treasury’s program, eligible insurers must be operated by either a financial institution holding company or a savings and loan holding company. The holding companies must also be regulated by a federal agency.
Treasury Secretary Henry Paulson asked Congress for wide discretion in the program. That’s prompting requests from myriad industries. Some want capital injections. Others want to sell troubled assets, such as bad loans, to the government.
For most of this year, the insurance industry seemed to be weathering the credit crisis. The industry has plenty of capital to pay policyholders, according to insurance regulators in two big states and senior executives at credit-ratings firms. But in recent weeks, the stocks of some of these firms have been slammed. More bad news is expected next week, when many of the large publicly traded life insurers report third-quarter earnings.The big ratings agencies have the life-insurance sector on “negative” outlook, anticipating a round of one- to two-notch downgrades, as companies brace for additional investment losses, weaker earnings and reduced financial flexibility. Many life-insurance products are pitched to consumers on the basis of an insurer’s financial strength, so moving to a lower rating can have an impact on sales.
Tags: Car Insurance Companies, credit squeeze, U.S. government
October 28th, 2008 by 
Melanie