Hartford, Lincoln Move Closer to U.S. Aid on Takeover Approvals

By Andrew Frye
Bloomberg News
January 10, 2009

Jan. 10 (Bloomberg) -- Hartford Financial Services Group Inc. and Lincoln National Corp. moved a step closer to getting capital relief from the U.S. government after a federal regulator approved the insurers' plans to buy lenders.

Hartford won permission for its acquisition of Florida-based Federal Trust Corp., and Lincoln was given approval to purchase Goodland, Indiana-based Newton County Loan & Savings, the Office of Thrift Supervision said on Jan. 9.

Life insurers turned to the government last year to help replace capital eroded by investment losses and slumping retirement products. The industry lost $77 billion in surplus in 2008, according to consulting firm Conning & Co., and stock declines of 50 percent or more at some of the biggest carriers made private capital increases expensive.

"The markets are effectively closed" to insurers seeking to sell equity, said Doug Meyer, an analyst with Fitch Ratings. "No one is really in a position to raise new capital externally."

The $700 billion federal bailout, originally designed to buy soured loans and securities from banks, has since become a tool for the Treasury to bolster firms including credit-card companies and carmakers. The 11-member Standard & Poor's Life & Health Index, which includes No. 1 MetLife Inc. and No. 2 Prudential Financial Inc., declined by half in 2008.

Life insurers are also lobbying regulators in an attempt to bolster capital. The industry's Washington-based association, the American Council of Life Insurers, is pushing watchdogs to change reserve rules in time to apply the relaxed standards to 2008 results.

Volatile Climate

Carriers need capital flexibility "to operate in a highly volatile economic climate," the ACLI told officers at the National Association of Insurance Commissioners in a letter dated Jan. 7.

American International Group Inc. previously got a $40 billion injection from the government, as regulators saved the insurer to limit losses at banks that did business with the firm. Analysts including Robert Haines of CreditSights Inc. have questioned the need to prop up life insurers, saying their failure wouldn't hurt the economy as much as a collapse at AIG, which sold protection on bonds to investment banks.

U.S. life insurers, which hold more than $1 trillion in corporate debt, need Treasury aid to buy bank bonds and help inject liquidity into the nation's credit markets, according to the ACLI.

"The point we made to Treasury -- and I think we made successfully -- is that while banks are retail credit, life insurance companies are wholesale credit," said Gary Hughes, general counsel and executive vice president of the ACLI, in an interview in November. "If you really want to unlock credit you have to address the retail and wholesale side of it."


Insurers, which are typically regulated by individual U.S. states, would be overseen by a federal watchdog such as the OTS after acquiring banks. Genworth Financial Inc.'s application is still pending, said William Ruberry, a spokesman for the OTS. MetLife and Prudential are already regulated by the OTS or Federal Reserve.

North American insurers have posted more than $120 billion in writedowns and unrealized losses tied to the collapse of the subprime mortgage market since the beginning of 2007.

Lincoln has said it may win access to $3 billion by taking over Newton County, which has about $7 million of assets. Philadelphia-based Lincoln halved its dividend in October.

Hartford has said acquiring Federal Trust may entitle it to $3.4 billion in U.S. capital. Hartford, based in the Connecticut city of the same name, is seeking a second capital injection after agreeing in October to sell $2.5 billion in stock and bonds to Allianz SE, Europe's largest insurer.

"We're pleased that we received approval from the Office Thrift Supervision," said Shannon Lapierre, a spokeswoman for Hartford. Lincoln's Laurel O'Brien didn't respond a telephone call.

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