U.S. Mulls Widening Bailout to Insurers

The Wall Street Journal
October 25, 2008

WASHINGTON -- 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, and New York Life Insurance Co., one of the highest rated insurers in the U.S., are interested in exploring a sale of equity stakes to the government, according to people familiar with the matter.

Broad participation in the rescue program would put more power in the hands of government to reshape the finance industry. On Friday, PNC Financial Services Group Inc., said Treasury would buy $7.7 billion of preferred stock and warrants. The cash injection will help the bank purchase struggling National City Corp., a move pushed by federal regulators.

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.

As they've sought to shore up their own balance sheets in recent weeks, insurance companies, like banks, have retreated from this role as lender, instead hoarding cash, according to Robert Riegel, a managing director at ratings firm Moody's Investors Service, which exacerbates the credit crunch.

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.

The investment funds would come from Treasury's recently announced plan to invest $250 billion in U.S. banks. Treasury has already committed $125 billion to nine large banks. More than 20 additional banks are expected to receive equity infusions in coming days.

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.

The Financial Services Roundtable, a Washington trade group, sent a letter Friday to Treasury asking for expansion of the government's equity injection program to include broker-dealers, insurance companies, auto makers and foreign-controlled firms.

Auto makers in particular are looking for a lifeline. On Thursday, members of Michigan's congressional delegation sent a letter to Mr. Paulson and Federal Reserve Chairman Ben Bernanke, urging the Bush administration to allow auto companies to participate in the program, a move many in Detroit hope would smooth the way for a merger of General Motors Corp. with Chrysler LLC.

State and local governments also are angling for help as they struggle to raise money. Members of Congress and several mayors have asked Mr. Paulson to use the rescue funds to buy state and municipal bonds.

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.

After Allstate Corp. released disappointing third-quarter results, Moody's Investors Service lowered ratings on the company's life-insurance unit to Aa3 from Aa2. The stated reasons included "the weakening of the [life] company's intrinsic credit profile," though it maintained the Aa2 rating for Allstate's core car-insurance business.

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.

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