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Will TARP Cover Be Enough For Insurers?
Posted: Apr 10, 2009 14:40 PM by Eric Fox
The recent U.S. Treasury announcement that the Troubled Asset Relief Program (TARP) will be expanded to include some insurers seems like good news, as the capital is badly needed. However, TARP capital hasn't saved bank stock prices from being crushed, so investors shouldn't expect miracles from this plan.
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When the Bush administration formulated the TARP plan last year, it was unclear whether other financial institutions besides banks would be allowed to participate. The insurance industry took it as a positive sign when Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) were both allowed to become bank holding companies, and thus become eligible to participate.
The Effect Of Government Actions
Other government actions seemed to confirm that insurers would be allowed to join. The government extended a lifeline to American International Group (NYSE:AIG) under the assumption that the failure of certain insurance companies would also pose a systemic risk to the financial system. With this in mind, along with falling stock prices, the insurers rushed out to buy banks. (Learn how to invest in companies before, during and after they join together; read The Merger - What To Do When Companies Converge.)
Hartford Financial Services (NYSE:HIG) agreed to purchase the Federal Trust Bank, a savings and loan institution in Florida. Genworth Financial (NYSE:GNW) found a small savings and loan with $1 billion in assets out in Minnesota called InterBank FSB. Lincoln National Corp. (NYSE:LNC) picked the Newton County Loan & Savings FSB as its savior.
Some Insurers Were Already Set
Prudential Financial (NYSE:PRU) already owned a federal savings bank called Prudential Bank & Trust, eliminating the need to find a bank partner to buy. MetLife (NYSE:MET) also owned a bank called MetLife Bank.
After the wave of deal announcements, the insurers promptly filed with the government to receive capital, and then waited. And waited. And waited.
Bad Timing
The timing of the Treasury plan couldn't have come at a worse time for some insurers. Protective Life Corp. (NYSE:PL) announced just a few days ago that its agreement to buy the Bank of Bonifay was being terminated at the request of the bank, as was allowed by the agreement between the two parties. The Bank of Bonifay is a private Florida bank with approximately $220 million in assets. (This measure can help investors spot potential trouble in a bank's financials. Find out how in Texas Ratio Rounds Up Bank Failures.)
The stocks moved higher after word leaked that the Treasury would finally allow insurers to receive capital under the TARP, as Wall Street hates nothing more than uncertainty. However, when the TARP plan came into law October 3, 2008, the Financial Select Sector SPDR (NYSE:XLF) closed that day at $18.32. It closed on April 10 at $10.63.
TARP Is No Saving Grace For Insurers
Investors who feel that the TARP being extended to insurers will be a saving grace for the group may be disappointed, as the large-cap bank index has fallen 50% since banks started receiving capital from the government.
By Eric Fox
Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.
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