More US insurance companies eye federal aid
Some of them, including Lincoln Financial, have bought small banks or thrifts in the hope of qualifying for government help.
Some of America’s biggest names in insurance are in line for a loan from Uncle Sam.Skip to next paragraph
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Last fall, many of them bought small banks or thrifts, in the hope this would qualify them to get some federal help. The insurance companies include names familiar to millions of Americans: the Prudential Financial, Hartford Financial, and Lincoln Financial. But hardly anyone has heard of the banks they bought.
Nonetheless, in the next several weeks, the government will announce if these banks – make that insurance companies – will receive government assistance.
In recent weeks, the insurance industry has been promoting its importance to the nation’s financial well-being, noting that it touches millions of Americans by providing life and health insurance and annuities. The companies often portray themselves as prudent as grandparents, and in marketing, they use warm and fuzzy images such as Snoopy the cartoon figure or geographic locations such as the Rock of Gibraltar. Many of them have loans out to real estate developments all over Main Street.
“Collectively they touch everyone, and they are the linchpin for retirement for America,” says Bob Litan, a senior fellow at the Brookings Institution in Washington. “It would shatter public confidence, at a time when public confidence is already pretty fragile, if the private version of Social Security were to fail.”
According to the American Council of Life Insurers, the industry has some $4.9 trillion invested in the US economy. Life insurers are the largest source of bond financing, with some $1.6 trillion invested in 2007.
Although it’s still early in the process, the insurance companies will need $50 billion to $70 billion, Mr. Litan estimates. “It’s a lot of money even in these days, but it’s more manageable than the banking industry,” he says.
On Wednesday, the US Treasury replied to a report in The Wall Street Journal that said it was within days of announcing aid for the insurance industry. In a statement, the Treasury said, "There are a number of life insurers who met the requirements for the Capital Purchase Program because of their thrift or bank holding status and applied within appropriate deadlines. These are among the hundreds of financial institutions in the CPP pipeline that will be reviewed and funded as appropriate on a rolling basis."
Any decisions will probably not come for weeks.
The CPP is a $250 billion program that is part of the Troubled Asset Relief Program. The program allows banks and thrifts to borrow money, but they must pay dividends to the taxpayers and return the money. Government officials stress it is not a bailout. Perhaps fewer than 10 insurance companies might qualify for the loans.
The industry has been buffeted by three factors, Litan says. Many of them have large stock portfolios that have gone down in value during the bear market.
Many of the companies also have written annuities, which promise to pay a fixed rate or variable rate of return. However, an insurance company can’t meet its annuity obligations if the company’s assets, such as mortgage loans, are not performing.