By David S. Hilzenrath
Washington Post Staff Writer
Friday, November 21, 2008
Several major life insurance companies are taking the extraordinary step of trying to buy savings and loan institutions in order to qualify for a piece of the government's $700 billion rescue fund.
The insurance companies are in relatively healthy shape, analysts say, but they either view the opportunity as too good to pass up or worry about the future.
"We are taking these actions as a strong and well-capitalized financial institution looking for maximum flexibility and stability," Ramani Ayer, chairman and chief executive of the Hartford Financial Services Group, said in a recent statement.
Aegon, parent of Transamerica, "believes it is prudent, and possibly advantageous, to explore the terms and conditions under which financial support may be available," the company said in a statement posted on its Web site.
Even if insurers succeed in transforming themselves into bank or savings and loan holding companies, there is no assurance they will receive any Treasury assistance.
"I'm not sure that's going to be a successful strategy. We will -- we are going to look only at applications that we think make sense," Treasury Secretary Henry M. Paulson Jr. said under questioning on Capitol Hill this week.
Neel Kashkari, who is overseeing the rescue fund, told a Washington audience this week that Treasury didn't want businesses trying to game the system. But what began as federal effort to bail out troubled banks is fast becoming a free-for-all.
Companies as diverse as American Express and GMAC, the auto loan giant, have been scrambling to restructure themselves in ways that would make them eligible to compete for a share of the money. Now add life insurers to the list.
Lincoln Financial Group, the Phoenix Cos. and Genworth Financial are among the insurers trying to become savings and loan holding companies and gain access to government funds. In addition, Principal Financial Group, which already owns a bank, said it is seeking to participate in the Treasury Department program.
Under the Troubled Assets Relief Program (TARP), Treasury is buying stakes in lenders it considers healthy and capable of giving the economy a boost.
Gary E. Hughes, general counsel of the American Council of Life Insurers, said the Treasury program was meant to help thaw a credit freeze and letting insurers participate would advance that goal. He noted that life insurers are major buyers of corporate bonds, which businesses issue to borrow money.
For big life insurers, the stakes are high. The Hartford estimated it would be eligible for a Treasury capital infusion of as much as $3.4 billion. To qualify, the Hartford said it has agreed to recapitalize Florida thrift Federal Trust Bank at an unspecified cost and buy its parent company for $10 million. Though the total cost of that deal wasn't disclosed, Federal Trust Corp. indicated in a September news release that it was prepared to sell a controlling interest in itself for $40 million to $55 million.
The legislation creating TARP suggested insurance companies could be allowed to participate, but the Treasury Department decided insurers would have to become bank or thrift holding companies first. Insurance companies are regulated at the state level, and Treasury wanted to be sure they were also subject to federal supervision.
It isn't clear that another layer of supervision would give the federal government additional protection against any risks associated with investing in the insurance companies. Federal regulators such as the Office of Thrift Supervision or the Federal Reserve would continue to rely on state regulators to oversee the insurance components, and they would have limited authority over those operations.
"The insurance regulation is the job of the insurance regulators," said OTS spokesman William Ruberry. For matters that only indirectly affect thrift subsidiaries of holding companies, "our authority becomes much more tenuous," Ruberry said.
Paulson put it this way in congressional testimony: "We don't have capability at the federal level looking at insurance."
Industry analyst Alan Rambaldini of Morningstar said insurance companies' interest in TARP funds makes him more pessimistic about their prospects.
Rambaldini said he sees it as "a sign of their concern that they don't have the capital to make it through the downturn."
Analyst Laura Bazer of Moody's, the credit rating agency, echoed others in saying the industry faces a negative trend. "But generally speaking, the major companies are well diversified and strong. And generally speaking relative to the banking industry, the insurance industry is in much healthier condition," she said.
Major life insurers as a group ended last year with about four times the minimum capital they are required to maintain to absorb losses, and they are likely to end this year with about three times as much capital as required, said analyst Douglas Meyer of Fitch Ratings.
Such big insurers as Mutual of Omaha and State Farm said they don't need the Treasury's help and aren't applying.
"State Farm has not applied for any of the funds in the Treasury's program and [has] no plans to do so. Our conservative business practices have served us well and our core business of insurance and banking remains solid," company spokesman Jeff McCollum said by e-mail.