Insurance Bailout Requests Raise Concerns

Nov. 19, 2008 — -- About two months after the government first announced its multibillion-dollar bailout of insurance giant AIG, more insurance companies are lining up for federal dollars, leaving some consumers worried about their insurance policies.

In recent days, the Hartford Financial Services Group, Lincoln Financial Group, Genworth Financial and Aegon have all announced plans to apply for the U.S. Treasury Department's Capital Purchase Program, part of the government's $700 billion financial rescue package (also known as the Troubled Asset Relief Program, or TARP).

Insurance companies "are suffering very badly because of the losses in their investment portfolios," said Neena Mishra, a senior financial analyst who covers banking and insurance at the investment research firm Zacks.

The government, she said, "is a very attractive source of capital."

The news has led to an uptick in phone calls from concerned consumers to the National Organization of Life and Health Insurance Guaranty Associations, which represents life insurance guaranty funds that pay consumers' claims if an insurance company fails.

Worried callers are asking what would happen to their insurance policies if their insurers went under, according to the group's president, Peter Gallanis. They "want some reassurance on the condition of the investment or the contract that they've purchased," he said.

Exactly how worried should consumers be?

A Genworth Financial spokesman declined to comment on the issue. Lincoln Financial Group and Aegon did not return calls for comment.

Shannon Lapierre, a spokeswoman for Hartford, which has millions of policyholders in the United States, said that while the company is "financially strong and well-capitalized," the insurer decided that requesting a TARP investment was a prudent move given "the potential for more extreme market volatility."

Life Insurance Industry Hit Hard

Bob Hunter, the director of insurance at the Consumer Federation of America, said that while this year has been a bad one for insurance companies, the years before it have been good, allowing companies to shore up their balance sheets.

Hunter said life insurance companies, in particular, have been hard hit this year because they were more likely to make investments in mortgage-backed securities. Still, he said, while at least one small life insurance company could buckle under its investment losses, the majority of companies are not in as much danger.

"Most of the regulated industry will stay solvent," he said.

Gallanis, meanwhile, cautioned against comparing insurance companies in the news today to AIG, which is receiving a total of $150 billion in investments and loans from the federal government.

AIG's "business model is not followed by any other company in the industry," Gallanis said.

"I think the industry's actually in pretty good shape," he said.

Most Customers Won't Be Affected

If one or more insurance companies go under, insurance guaranty fund organizations say they're prepared to step in to ensure that most consumers continue receiving the benefits guaranteed by their policies.

"In any situation where you've got a number of insolvencies or a huge major insolvency, funds have proven themselves to be flexible," said Barbara Cox, the vice president of legal and regulatory affairs at the National Conference of Insurance Guaranty Funds.

Every state has at least two guaranty funds that cover claims associated with insurance companies that have shut down. One fund covers property and casualty claims, including workers' compensation, and another handles life insurance, health insurance and annuities. The funds are supported by assessments charged to insurance companies.

In the last six years, guaranty funds in the United States have paid a total of about $10 billion in claims, according to the guaranty funds group.

In the past, there's been criticism of guaranty funds for taking too long -- in at least one case, years -- to address claims, but Gallanis said the process is much faster today.

"We continue [customers'] coverage from the time the company fails," he said. "You never miss a beat."

Government Assistance Not Guaranteed

Whether insurance companies will succeed in their efforts to get federal TARP money remains uncertain.

In order to be eligible for the program, Hartford Financial Services Group, Lincoln Financial Group, Genworth Financial and Aegon have all announced plans to buy banks and attain approval to become savings and loan companies.

Testifying before Congress Tuesday, Treasury Secretary Henry Paulson said he wasn't sure that was "a successful strategy."

"We are going to look only at applications that we think make sense," he said. But Paulson added that a number of insurance companies are already bank holding companies.

"It may make sense to put capital into those institutions that are playing a vital role in lending and keeping our economy going," he said.

Proponents of directing TARP money to insurance companies argue that, by buying corporate debt, insurance companies have played a major role in the U.S. financial system.

Jack Dolan, of the American Council of Life Insurers, said that lately, the "irrational markets" have led insurance companies to hoard cash instead of investing it. TARP funds, he said, would help insurance companies return to the corporate debt market.

"It provides something of a safety net to allow us to continue or to get back more aggressively into our ways of providing capital and liquidity to companies and corporations," he said.

If insurance companies with newly acquired banks succeed in their TARP applications, they could see capital injections that are many times greater than the amount they originally spent on buying banks.

Hartford, which plans to spend $10 million to buy Federal Trust Corp. in Sanford, Fla., estimates that it could receive between $1.1 billion and $3.4 billion from the rescue plan.

That, said Zacks' Mishra, "is a very handsome return."