Hartford, Genworth Among Those Reorganizing for Treasury Funds

WASHINGTON, Nov 17, 2008 (A. M. Best via COMTEX) -- HIG | Quote | Chart | News | PowerRating -- Hartford Financial Services Group Inc. and Genworth Financial Inc. both announced they are seeking to reorganize as savings and loan holding companies to become eligible for cash infusions under the U.S. Treasury Department's month-old Capital Purchase Program.

The two multiline insurers were among the firms to complete applications to participate in the $250 billion CPP ahead of a 5 p.m. Nov. 14 deadline. The program, which makes use of funds allocated under the $700 billion Troubled Asset Relief Program, is open only to federally regulated, U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies.

In order to gain eligibility for the program, both Genworth and Hartford announced acquisitions of savings and loan institutions, and that they had applied to the federal Office of Thrift Supervision to change their holding company structures.

Hartford announced a $10 million deal to purchase Sanford, Fla.-based Federal Trust Bank, a federally chartered savings bank insured by the Federal Deposit Insurance Corp. The deal, which also would require Hartford to contribute some additional amount to recapitalize the bank, is subject to the company having its application for CPP participation approved. Hartford estimated it could be eligible for between $1.1 billion and $3.4 billion under the guidelines Treasury has set out for the CPP.

"We are taking these actions as a strong and well-capitalized financial institution looking for maximum flexibility and stability," Hartford Chief Executive Officer Ramani Ayer said in a statement. "Securing capital at the terms available through the Capital Purchase Program could be a prudent course in this market environment and would allow us to further supplement our existing capital resources."

Rolled out Oct. 14, the CPP allows eligible institutions to sell preferred shares, along with warrants for common shares, to the Treasury that pay 5% annual dividends for the first five years, which then escalate to 9% dividends thereafter. Participating companies must adopt the Treasury Department's standards for executive compensation and corporate governance for as long as Treasury holds equity issued under the program.

Genworth announced an "agreement in principle" to purchase Maple Grove, Minn.-based InterBank fsb, which it said was "subject to negotiation of a definitive agreement" and as well as to regulatory approvals. Interbank also confirmed the deal, saying it "from time to time has explored entering into transactions with third parties which, like the present transaction, are intended to provide enhanced services by a larger financial services company to its customers, communities and constituencies."

Genworth had earlier disclosed it would be excluded from participating in the Federal Reserve's Commercial Paper Funding Facility due to recent credit rating agency downgrades of its holding company (BestWire, Nov. 11, 2008). The company also noted that stresses in the credit markets made it difficult for the company to issue commercial paper during the third quarter. On Nov. 13, the company announced it had drawn down $930 million on its lines of credit, which the life and mortgage insurer said it will use to pay down outstanding holding company debt, including $1.1 billion of senior notes set to mature in mid-2009.

At press time, no comprehensive list of firms that submitted applications ahead of the CPP deadline was yet available, but it could include several insurance companies. The Associated Press quoted OTS spokesman William Ruberry saying the regulator had received similar applications from Lincoln National Corp., based on its purchase of Newton County Loan and Savings Bank, and Dutch financial services firm Aegon N.V., parent of Transamerica Life Insurance Co., following its purchase of Suburban Federal Savings Bank. Neither Ruberry nor the companies could immediately be reached for comment.

Other major life insurers could be eligible to participate in the CPP by virtue of being organized as bank holding companies, as in the case of MetLife Inc., or due to the fact that they operate savings banks supervised by the OTS, such as those held by Prudential Financial Inc., Ameriprise Financial Inc., Nationwide Financial Services Inc., Allstate Corp. and Principal Financial Group Inc.

New York Life Insurance Co. and Massachusetts Mutual Life Insurance Co. both have declared they would not seek participation in the CPP, citing their adequate capitalizations and commitment to a mutual structure as reasons not to participate. Northwestern Mutual Life Insurance Co. said last week it "has not determined whether or under what circumstances it would participate in any Treasury program."

A number of major property/casualty insurers also have declared that they would not seek participation in the program, including Chubb Corp., Travelers Cos. and Ace Ltd. The American Insurance Association, Property Casualty Insurers Association of America and National Association of Mutual Insurance Companies have said the CPP should not be extended to property insurers, while the American Council of Life Insurers and the Financial Services Roundtable have lobbied for insurers' inclusion under the TARP.

Although insurers were included in the definition of "financial institutions" that initially would have been permitted them to sell distressed mortgages and mortgage-linked securities to the Treasury under the TARP program, Treasury Secretary Henry Paulson last week clarified that, after devoting the initial $250 billion TARP allocation to a plan to purchase preferred stock in federally regulated banks and thrifts, as well as $40 billion of preferred shares under a revamped bailout of American International Group Inc., he did not believe purchasing illiquid mortgage-related assets to be the best use of the remaining TARP funds.

A.M. Best recently revised its rating outlook for the U.S. life insurance industry to negative from stable, noting that write-downs on illiquid investments have been exacerbated by widened corporate credit spreads in addition to securities linked to subprime and Alt-A residential mortgages. The company also identified emerging investment risks in commercial mortgages, including both direct loans and securitizations; asset-backed securities such as credit card receivables and automobile loans; alternative investments such as limited partnerships and hedge funds; as well as prime residential mortgage-backed securities.

(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)

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