Biz Redrawn for Treasury Access

It is really interesting to see how companies are finding ways to gain access to the TARP funds. Initially, the investment banks -- Goldman Sachs (GS - Analyst Report) and Morgan Stanley MS - Snapshot Report) -- then credit card companies like American Express (AXP - Analyst Report) converted themselves into bank holding companies, and now at least three U.S. insurance companies -- Hartford Financial Services (HIG - Analyst Report), Genworth Financial (GNW - Snapshot Report) and Lincoln National (LNC - Analyst Report) have applied to the Office of Thrift Supervision (OTS) to buy savings and loan companies in order to get capital infusions from the Treasury.

Dutch insurer Aegon NV (AEG - Analyst Report) has also stated that it may buy a small U.S. thrift company to qualify for the capital infusion. We should not be surprised if the big three automakers convert themselves into bank holding companies to get a piece of the pie.

If the insurers become eligible to gain access to TARP, it would be a very handsome return for small investments.  For example, Hartford Financial has sought OTS approval to buy the savings and loan parent company of Federal Trust Bank for about $10 million and will spend some additional amount to recapitalize the bank. In exchange, HIG estimates that it will be eligible for a capital injection of between $1.1 billion and $3.4 billion. Further, the terms are extremely attractive in the current state of economy as the 5% coupon for five years under the Capital Purchase Program represents very cheap source of capital.

We do not know how the lawmakers will react to the proposal and whether the insurers will get a capital infusion from the government. If the purpose of the program is to stabilize the financial markets, then the insurers should be eligible to get the money since they are very important to the health of financial markets. But the insurers are competing with many other financial firms for a shrunk pie now, as only approximately $90 billion is left of $350 billion of bailout funds that are being used initially.

While we would view the capital infusion, if any, as positive for HIG, we remain concerned with the increasing losses on the investment portfolio and the variable annuity business and our rating on the shares remains unchanged at a Sell.