TARP Revisit: Were Life Insurers On the Brink? (MET, PRU, HIG, LNC, GNW, AIG)

There is one question that keeps making the rounds after the news of yesterday’s TARP bailout money inclusion being offered to life insurers.  Are these really close to falling into the abyss, all over again?  You will see the large gains racked up yesterday, but there is a lot more to this than may meet the eye.

Insurer (Ticker)………… Gain… Mkt Cap.. Comment (year stock drop)
MetLife, Inc. (MET)……… 2.36%.. $20.2B.. down almost 66%
Prudential Financial (PRU).. 7.74%.. $10.1B.. down almost 75%
Hartford Financial (HIG)…. 13.5%.. $3.12B.. down over 80%
Lincoln National (LNC)…… 32.80%. $2.3B… rose on debt repayments
Genworth Financial (GNW)…. 11.48%. $1.0B… down almost 90%

The questions and discussions that came from the financial community to us yesterday about the TARP money were not so much around the “freshness” of the data.  Some insurers had been in line for months.  The TARP was meant to allow for inclusion of some insurers which had bank holding companies, and some insurers had been complaining that they were being left out or being put at a competitive disadvantage after American International Group Inc. (NYSE: AIG) was receiving so much bailout money.  The issue boils down to liquidity, capitalization, and the sheer need of more capital.

In recent months, the once revered and still watched portfolio manager Ken Heebner of CGM Funds had been saying that life insurers were a considerable asset buy.  If he loved them then, he’s got to love them now.  Assuming he hasn’t had to dump them.  And to top it off, insurers had exposure to every sort of scandalous investment out there: CDO’s, derivatives, Bernie Madoff, Auction Rate Securities, and on.

But a rally at this point after some of these have regained handily from lows due solely to TARP eligibility just brings up this serious question… How close are these to failure?  Insurance is a trickier business in many cases because they are regulated state by state and for now there is now “systematic risk regulator” that gets to monitor all of these operations.  If an insurance company fails, there is the likelihood that a state would have to make good on a policy.

Ratings agencies have been reviewing insurers as well even after many have been downgraded, because many insurers have lost considerable value in investment portfolios due to 50% stock losses and due to owning many now-illiquid debt instruments and derivatives.

Many of these insurers were up much more than what they closed at.  The timing and the details of the Treasury inclusion of life insurers is one reason for the lack of closing on highs.  But there has to be this pesky notion inside trader and investor minds.  Are these guys really 0on the brink of failure?  Genworth is out of GE, and they are down even more than the former parent.  MetLife used to advertise that they could pay all of their claims in entirety.

These insurance companies have to maintain solid reserves against their policies, because with life insurance policies there are claims every year against a certain percentage of their investments.  Many insurers had been granted regulatory approvals to ease certain capital requirements that ultimately boosted their liquidity.  This was also to cut the chances that they would need to raise additional capital.

Participating in government bailout programs does not come without a price.  Congress was off this week, so it will not be another week or two before the Congressmen get to show their additional outrage in their grand-standing fashion on television networks.  Suddenly, management teams can be paraded in front of Congress with questions about executive compensation, travel methods, extravagant lifestyles, and on and on.  A quick review of salaries in these companies shows that many executives make mid-single-digit incomes, in million of dollars of course, and many managers have exercised options packages that go into the double-digits, again in millions of dollars.

TARP money may gives these insurers a further cushion.  Maybe this cushion is really aimed at protecting states from having to be on the hook if these go into state receivership.  The list of maybes can go on and on.  Unfortunately, the need for the ailment here, not a cure, only highlights how sick some of the patients in this sector really are.

Maybe the question is not really just “are they on the brink of collapse?”… It sounds more like a situation where we need to ask if these were on the brink of collapse AGAIN.

Jon C. Ogg