Saturday, May 16, 2009

Musings On Treasury’s CPP and Confidence

With what seemed an interminable wait finally over, on May 14, the Treasury Department informed insurers that they have been given the preliminary green light to participate in the Capital Purchase Program.

Among the insurers who got the preliminary go ahead to participate in up to $22 billion in Treasury assistance, were Allstate Corp., Ameriprise Financial, Hartford Financial, Lincoln Financial, Principal Financial and Prudential Financial. Hmm. There are a lot of Financials there. When did the moniker of ‘life insurance company’ fall out of favor? OK, back to the main point.

Hartford was approved for $3.4 billion, Lincoln Financial, $2.5 billion and Principal, $2 billion. Allstate and Prudential say they are evaluating their options and Ameriprise said ‘thanks, but no thanks.” It says that it has adequate capital.
Standard & Poor’s responded that the announcement was generally favorable and that depending on the company, it could result in ‘negative’ outlooks being revised to ‘stable’ and, in some cases, combined with other factors, could result in an upgrade.

Previously, other rating agencies have also weighed in. In an article in, Stephanie McElroy, manager of ratings criteria for A.M. Best Co., says that the impact on ratings is neither a plus nor a minus and that companies applied “opportunistically” to the program. Moody’s Investors Service released an assessment stating that the program is a short-term plus. Whether it has a long-term impact on companies and ratings depends on a number of points including how the new capital is managed, Moody’s Vice President Ann Perry states.

A couple of things strike me. The first is why it took so long for Treasury to come to a decision and why the program was structured so that insurers had to jump through hoops like owning a bank, to even qualify for the program. The insurance industry is a big engine in the U.S. economy and shouldn’t be treated like the government’s step child while Washington throws money at banks.

The one exception, of course, is American International Group, which received $70 billion in funding from the government on the spot. But that situation was so immediate that it couldn’t be ignored. And, although no one can be entirely sure how the money was used because the government is mum on the issue, some of it might have gone back to banks. Which again speaks to my point: Why so easy for the banks and so difficult for insurers?

It also strikes me that as important as the capital is, the confidence that the offer of an infusion can instill is every bit as important. In the financial services world, public perception is a critical asset. And the fact that at least one company, Ameriprise, can decline the government’s offer, should only help affirm that confidence. It also speaks to Ms. McElroy’s point about companies applying to the program “opportunistically.”

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