What if Insurance Companies Don't Pay?

Let’s hope your policy is with an insurance company that has ruinous trading losses and heavy exposure to derivatives. That’s what it took for AIG to be rewarded with a direct government bailout.

In something of a creative interpretation of the mandate given by Congress to continue funding the so-far-failed bailouts of banks, Bloomberg reports on Oct 24: “The Treasury is considering taking stakes in insurers . . .” which “would widen the scope of Secretary Paulson’s Troubled Asset Relief Program (TARP) as the credit crisis deepens. “Capital adequacy has been a major concern among investors” in insurance companies, said Morgan Stanley analyst Nigel Dally. “If the Treasury were to purchase preferred equity stakes in some insurers, it would help calm these concerns.''

Purportedly, insurance companies, primarily life so far, have approached the Treasury for direct investment, or in the vernacular, a bailout. As would be expected in their line of work where the welfare of others is a hallmark of their business model, they want all life insurers to be on the receiving end of the government’s largesse. The reason, the companies state, is to lessen the embarrassment, or to cover up*, or to fool the public, if you will, for the few that actually need an investment, or bailout, and have been turned down, or laughed at, or shunned by private investors. (*The actual term used was cover up. I’m not making this up, just ask Jeff Matthews.)
Insurance Company Watch List

Insurance company third-quarter results are starting to come out. One company that had been rumored to be on shaky ground, The Hartford, announced a $2.5bn capital investment by Allianz SE, the reduction of its dividend and pre-announced a third-quarter loss. Prudential also pre-announced third-quarter losses, as did a number of other life insurers.

MetLife, in a bit of a departure from the others, pre-announced third-quarter results in the Tehran Times. The Tehran Times also reported that “the insurer . . . plans to offer 75 million common shares to supplement the company's capital position. “ We’ll let you know how that goes; however, the Tehran stock market is doing quite well this year. http://www.tehrantimes.com/index_View.asp?code=179624

MetLife and The Hartford were put on negative watch by Standard & Poor’s earlier this month. The CDSs of both companies “were trading upfront, a sign of distress and heightened worry of a potential default.” By way of explanation, Chairman, President and CEO Mr. C. Robert Henrikson said, “MetLife continues to be a strong, stable leader in the financial services industry during a challenging environment.”

In agreement with Mr. Henrikson about the challenging part, Standard & Poor's said it is revising its outlook on the US life insurance sector to "negative" from "stable." It expects higher-than-usual credit losses and lower fee-based revenues as a result of the current turmoil in financial markets.

Now’s the time to amend living wills and revoke those do-not-resuscitate clauses if you, or an insured loved one, anticipate death anytime soon. And by all means, don’t jump, at least not until this matter is resolved.

mg