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Posts Tagged ‘Hartford Financial’

Where Will TARP Money Go? Let’s Start in Hartford

Posted by Larry Doyle on June 9th, 2009 3:03 PM |

Secretary Geithner and President Obama today hailed the repayment of $68 billion in TARP funds as a clear indication of the success of the overall financial recovery programs implemented by the administration. Well, as those familiar with the “shell game” know, in order to keep the game going it is critically important to display some winners on a regular basis.

How do we know the TARP funds were utilized properly and everybody won on this government investment? We don’t, despite what Barack says. Money is fungible. The system was saved, with no small thanks to the FASB’s relaxation of the mark-to-market. These TARP recipients are designated as the winners. Meanwhile, the system still has upwards of $500 billion – 1.25 trillion in embedded losses, depending on whose projection you would like to use.

In my opinion, I believe Barack and team would have preferred to keep the TARP funds within these financial institutions. That said, there are other factors at work here. What are they?

1. when the TARP legislation was passed last Fall during the Bush administration, it set specific ground rules necessary for repayment. Barack, Tim, and team would have run the risk of flouting that legislation if they did not allow some firms to repay.

2. the administration will still be able to wield significant influence over these firms via a number of other Fed backstops already in place.

3. not being widely publicized but of very real significance, the administration will need these funds in other firms. What firms? Let’s drive on over to Hartford.

As the WSJ recently revealed, Hartford Chief Expects TARP Funds Soon:

It is expected in the next few weeks to get as much as $3.4 billion in funds under the Treasury’s Capital Purchase Program.

Hartford’s stock was down today as it is being downgraded by equity analysts at Citigroup due to management issues.

Recall that Hartford was one of 6 insurance companies that received thrift status by acquiring a controlling stake in a small institution. As such, these firms became eligible for TARP funds. In my opinion, once the TARP dam is broken with one insurance company, the stigma is lessened for others to acquiesce in accepting these funds.

What might be the next stop after Hartford? Perhaps Newark (Prudential Insurance) or Philadelphia (Lincoln Financial). Sense on Cents will monitor where the TARP train moves next.

LD

Heavy Losses Raining on Insurance, Roll Out The TARP

Posted by Larry Doyle on May 15th, 2009 8:29 AM |

The fact that a handful of insurance companies are eligible to receive government funding via the TARP is a much bigger event than the benign media reports would indicate. In my opinion, the news reported by Bloomberg, Prudential Said To Be Among Insurers Cleared For TARP, is a clear sign of a much larger storm on the horizon. Why? Let’s get after it.

Not every insurance company has the same business profile. Some are more aggressive in underwriting. Some are more aggressive in their investment portfolio. Some are more aggressive in their product offerings. That said, they’re all members of the same family and if one has the flu, you can rest assured many others are also sick.

On March 12th, in Is My Insurance Insured?, I wrote:

While the government has already taken an 80% stake in AIG, how do the state insurance commissioners deal with entities like Hartford, Met Life, and others with outsized risks and resulting declining capital cushions? Let’s go visit Uncle Sam!! That’s right, if you thought “bailout nation” was already swamped by banks, automotive companies, and Freddie/Fannie, the fun continues: The Next Big Bailout Decision: Insurers.

Fast forward to May 15th and here we are.

Why do the state insurance commissioners have to go to Washington? What about the reserves at the state level? Well, are you sitting down? Those reserves nationwide total only $8 billion.

Can insurers write enough premiums quickly enough to generate sufficient capital to address the losses? That is the $64 billion question. Actually, it will likely be much larger than that. Why?

As consumers are strapped for liquidity and getting credit lines squeezed – if not totally cut by their banks – they will look to tap the cash value of their insurance at an ever greater rate. If consumers were to triple the rate at which they have tapped these lines, the insurance industry would experience a capital drain of approximately $500 billion. Insurance companies will be forced to raise capital via debt or equity offerings, asset sales, or drawdowns of cash and liquidity reserves. The industry has approximately $450-$500 billion in cash and liquidity reserves. “Houston, we’ve got a problem.”

Haven’t insurance companies benefitted from the relaxation of the mark-to-market? No, they do not utilize that form of accounting. Insurance companies typically carry assets at cost or model valuations.  If and when the assets suffer a prescribed level of defaults, the losses must then be recognized via a write down in the asset’s value. As losses via defaults and foreclosures across their assets continue to increase, well, that’s why we just saw these insurers “roll out the TARP.”

Can’t the insurance companies sell their assets to stem the losses? Not easily. Why? Insurance companies have traditionally reached for yield (higher rates of return) by purchasing higher risk assets or writing higher risk insurance. In doing so, the industry has sacrificed the liquidity associated with lower risk assets/products. What are these assets and where do the problems lie?

1. Annuities: this product was aggressively underwritten by insurance companies after the meltdown of the NASDAQ in 2001-2002. A principal protection component was particularly attractive to many investors. That component provided investors downside protection but is now a large source of pain for the industry. In short, investors won, insurance companies lost as the market plummeted.

2. Commercial Real Estate: aside from the banks, insurance companies are the largest underwriters and holders of CRE. Insurance companies not only originated billions in CRE but they were typically the biggest buyers of the subordinate classes of CMBS (commercial mortgage backed securities) deals underwritten by Wall Street banks.

3. Defaults: with default rates on loans (mortgages, corporate, commercial real estate) expected to at least double, likely triple, and in the most credit sensitive sectors potentially quintuple, these losses will quickly burn through established reserves.

As Bloomberg reports:

“If you had some of these companies, the bigger ones like Hartford, go into a spiral, that would just cause another round of panic,” said Robert Haines, a New York-based analyst at CreditSights Inc. “I don’t like the idea of the government getting involved with these companies. You’re making to an extent a deal with the devil, but your options are really limited at this point.”

The problems within the insurance industry are not contained to the firms (Hartford Financial, Prudential, Principal, Allstate, Ameriprise, and Lincoln) that received approval for TARP funds. These institutions are eligible for government funds via TARP because they have bank subsidiaries or have purchased a bank or S&L. What about the insurance companies not in that position? Stay tuned.

Sense on Cents will be monitoring this situation very closely.

LD

For a compilation of posts by Sense on Cents on this topic:

January 12th: Got Insurance? 529 Plans? Financial Aid? Read On…
-an interview with Sean D’Arcy, a longstanding professional within the insurance industry and financial planning space. Sean laid out all the problems.

March 12th: Is My Insurance Insured?
-a review of the fact that policyholders have credit exposure to their insurance carriers.

March 30th: What Is Lincoln Thinkin’?
-a review of Lincoln Financial’s purchase of a small savings and loan in Indiana in order to gain access to government funding.

April 6th: Insurance Companies’ Ignorance Is Definitely Not Bliss!!
-a survey of insurance brokers in which the brokers maintain the insurance companies did not appreciate and understand the degrees of risk embedded in insurance products sold.

April 7th: Uncle Sam To Throw Lifeline To Life Insurers
-a post pointing toward the move made yesterday.

No TARP For You!!

Posted by Larry Doyle on April 13th, 2009 1:49 PM |

No soup for you!

No TARP for you!

Who can ever forget the Seinfeld episode featuring the Soup Nazi? Well, in that same vein, the insurance company Genworth Financial was just summarily thrown out of the Treasury “line” to receive TARP funds. The WSJ reports, Genworth Financial Shares Slump on TARP Ineligibility

Shares of Genworth Financial Inc. fell as much as 31% Monday as investors responded to the insurer’s late-Thursday announcement that it is ineligible to participate in the Treasury’s Capital Purchase Plan because it missed a deadline that Treasury won’t extend.

The mere fact that Genworth, Hartford Financial, Protective Life, or any other insurer are requesting government funds is another version of the “putting perfume on a pig” play we saw with the FASB relaxation of the mark-to-market. Why is that? 

The TARP (Troubled Asset Recovery Program) was designed by Congress for banks needing increased capital. If investment banks can become bank holding companies, why not insurance companies as well? Perhaps, the next thing you know, we’ll have plumbers designating themselves as banks. How about construction companies? Maybe a bakery or two? Anybody for a newly defined U.S. Financial Blogging Bank? Where do I sign? We could all use some “soup.” (more…)






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