Insurers to Get TARP Funds

Highlights include Hartford Financial Services (HIG - Analyst Report), Genworth Financial Inc. (GNW - Snapshot Report), Lincoln National Corp. (LNC - Analyst Report), Prudential Financial, Inc. (PRU - Snapshot Report) and MetLife, Inc. (MET - Analyst Report)

The Wall Street Journal reported this morning that the Treasury has decided to extend Troubled Asset Relief Program (TARP) funds to insurance companies, and the announcement regarding the expansion is likely to come within the next several days.

Treasury had said last year that life insurers could be eligible for TARP funds if they owned bank-holding companies, and as a result, a number of life insurers -- including Hartford Financial (HIG - Analyst Report), Genworth Financial (GNW - Snapshot Report) and Lincoln National (LNC - Analyst Report) -- had bought small Savings & Loan companies last year so as to qualify for the funds, but have not received any confirmation from the Treasury so far. Some insurers like Prudential Financial (PRU - Snapshot Report) and MetLife (MET - Analyst Report) were already bank/thrift holding companies.

Life insurers have suffered frequent ratings downgrades from all key rating agencies in the past few weeks as a result of lower operating results, high investment losses and reduced financial flexibility. The group's earnings are heavily correlated to the equity markets, particularly within the variable annuity businesses, and have suffered badly as a result of stock market declines.

Further, most life insurers are heavily exposed to Commercial Mortgage Backed Securities (CMBS), which have resulted in increasing losses in the investment portfolio, as the downturn in Commercial Real Estate pricing has escalated.

Rating downgrades have made it even more difficult for these companies to raise capital in the current challenging environment. Access to government bailout TARP funds should provide some comfort to these companies.

The Treasury had recently stated that it has about $130 billion remaining in TARP money (including the expected returns), and now if the program is expanded to bailout the insurers, it appears that the Treasury will not have enough funds to recapitalize the banks that are found to need additional capital after the stress tests.

As such, the Treasury may have to soon approach the Congress for more bailout money beyond the $700 billion allocated for TARP.