Treasury Undecided Over Federal Bailout Funds for Life Insurers
By Lilla Zuill
November 26, 2008
Life insurance companies, nervous over massive investment losses that could ultimately threaten their viability, are hoping they are next in line to get a piece of the U.S. financial bailout.
They argue federal funds could stabilize their trillions in investments and warn that any failure of a life insurer could dry up a key source of corporate financing.
But U.S. officials are not convinced.
Treasury Secretary Henry Paulson said Tuesday he had not yet decided whether other insurers would get federal funds. The only insurer to get government help so far is American International Group Incwhich was saved from bankruptcy with a rescue package that has ballooned to $152 billion.
As the biggest buyers of U.S. corporate bonds, life insurers say they grease the wheel of corporate America. Industry officials insist the failure of a large U.S. life insurer would drastically shrink bond financing, potentially creating another hurdle to the nation's economic recovery.
While no big life insurer has collapsed, companies have tightened their purse strings after heavy investment losses eroded their capital levels in the third quarter.
Hartford Financial Services Group Inc., which sells both life and property insurance, reported a $2.6 billion quarterly loss on Oct. 30, the 189-year-old insurer's worst-ever result, mainly from bad investments in financial companies.
Prudential Financial Inc, the No. 2 U.S. life insurer, had a $108 million net loss, and withdrew its 2008 earnings forecast, citing market volatility. Genworth, a smaller insurer, recorded a $258 million net loss.
Analysts warned that the fourth-quarter outlook for the sector is even gloomier, with growing concerns that their investments in commercial mortgages will lead to more red ink as values drop.
In recent months, life insurers have scaled back the size of investments, trimmed dividends to hold on to cash and girded for further losses and possible rating downgrades, which would trigger higher capital requirements.
Jittery investors have sent the Dow Jones U.S. life insurance index <> plummeting more than 60 percent since mid-September. Shares of Genworth Financial Inc and Hartford have fallen 90 percent in that period, and Prudential has dropped nearly 80 percent.
TRILLIONS IN BONDS
Life insurers had more than $1.8 trillion invested in corporate bonds, $462 billion in government bonds, $302 billion in commercial mortgage investments and $20 billion in real estate holdings at the end of 2007, according to the American Council of Life Insurers (ACLI).
"Life insurers are the number one purchasers of corporate bonds," said Jack Dolan, an ACLI spokesman. "They grease the wheels for financing corporate America. In essence, they are the wholesalers of credit, while banks are the retailers," he said.
The insurers are susceptible to the credit crisis through their investment portfolios, real estate holdings, and higher costs for reserves and hedging related to investment-linked retirement products they sell.
Life and retirement policy holders are largely protected if an insurer fails through state guaranty funds into which all insurers pay to insure that obligations are met.
Analysts say U.S. officials still need to be convinced.
"It is far from clear that Treasury views the possible collapse of a major insurer as posing anywhere near the systemic risk that a collapse of Citi(group) would have posed," said Barclays analyst Eric Berg in a Monday research note.
"Life insurers, while major lenders to business through their public and private bonds, are simply not as important to the day-to-day working of the economy, especially of smaller businesses, as are banks," he added.
Berg said Treasury officials have been briefed on insurers' plight in meetings with industry executives.
Federal support for life insurers would "provide a level of confidence to return to investment activities," said the ACLI's Dolan.
The government may have enough on its plate for now, though. Just days ago, the government stepped in with a major rescue of Citigroup Inc, the second largest U.S. bank by assets, injecting $20 billion in new capital and guaranteeing some $300 billion in potentially toxic assets.
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