Life Insurers May Take A Pass On 1Q Charges As S&P Rises
15 April 2009 - 9:21PM
Dow Jones News
After waiting months to apply for cheap government capital, some
life insurers may hold out just a bit longer to see where the
equity markets are going.
If the S&P 500 stock index does well in coming days, life
insurers might avoid huge so-called deferred-acquisition-cost
charges, or DAC, on their variable annuity holdings, which could
make the difference for some as to whether they need to ask for
help through the TARP Capital Purchase Program.
"It is a credit line insurers won't use unless they have no
other choice," said Hubert Mueller, a principal with Towers Perrin,
an insurance consultant. A company's taking capital gives the
government an ownership stake, and the right to set "limitations on
what they can and cannot do."
Whether or not some life insurers need to access the capital
could hinge on how the markets do in coming days. Falling equity
markets trigger capital-depleting DAC charges to cover expected
commission and fee costs for variable annuity accounts. If markets
are seen to be rising, insurers can spread the costs over a longer
period.
After falling to below 667 in early March, the S&P 500 has
risen, closing at around 797 on March 31, and reaching 847 Tuesday.
Though still below its 903 close at year-end, Mueller believes life
insurers may look at early April's rise and skip a DAC charge for
the quarter.
"There is some judgment involved," Mueller said. For companies
facing a capital squeeze, "if the market goes sideways or up, they
may hold up." The most thinly capitalized insurers will still go
for TARP capital, given the tough economic climate, even if they
skip the charge, but better-capitalized insurers may say no,
Mueller predicted.
MetLife Inc. (MET) the largest U.S. life insurer, said this week
that it will skip the Capital Purchase program.
Hartford Financial Group (HIG) may need the capital even without
a DAC charge.
Credit Suisse analyst Thomas Gallagher also suggested Hartford
might not take a potential $1.2 billion DAC charge because of
higher equity markets in the first weeks of the second quarter. If
so, "we estimate that they would generate positive [earnings per
share] of $1.25, or nearly a $4 swing" in earnings per share.
Gallagher put potential first-quarter DAC charges at $125
million for Prudential Financial (PRU), $80 million for MetLife
Inc. and $35 million for Lincoln National Corp. (LNC).
Fox-Pitt Kelton analyst Mark Finkelstein said that - of the life
insurers he covers - Hartford, Lincoln National and Principal
Financial Group (PFG) would be most likely to benefit from TARP
money.
Genworth Financial (GNW) said earlier this week that it will not
be able to participate in Treasury's capital program because its
application for a thrift charter was not approved in time.
The Dow Jones Life Insurance index was up 2.3% recently, while
the S&P 500 was down 0.25%.
-By Lavonne Kuykendall, Dow Jones Newswires; (312) 750 4141;
lavonne.kuykendall@dowjones.com