Perspectives: AIG's Example Offers Case Study for Industry's

OLDWICK, N.J., Apr 06, 2009 (A. M. Best via COMTEX) -- High-profile investors like Carl Icahn long have been slapped with the tag "activist shareholders," known for their proxy fights and their vocal advocacy on corporate governance issues.

But as the past few weeks have amply demonstrated, there is perhaps no class of shareholder more vocal, or more activist, than the American taxpayer. And when they get worked into a froth over an issue, as they have been over the payment of $165 million in retention bonuses at American International Group's Financial Products unit, the ensuing chaos can render a society, much less a company, virtually ungovernable. Already, the AIG imbroglio has prompted Congress to move on bills to tax, claw back and otherwise ban such payments at firms receiving Treasury aid, and more moves could still be in the offing.

Which begs the question of why anyone, much less fellow insurance companies, would want to follow AIG's example and crawl under the TARP. And yet, among the many items sitting in Treasury Secretary Tim Geithner's inbox are the applications of a dozen life insurers that have applied to participate in the Troubled Asset Relief Program's Capital Purchase Program, each seeking anywhere from $1 to $4 billion investments from the federal government.

Only seven of the 12 have thus far identified themselves publicly, and only Principal Financial and Prudential Financial did so voluntarily. Applications by Hartford Financial Services, Lincoln National and Phoenix Life were made public by the federal Office of Thrift Supervision, as each was approved to convert to a thrift holding company. Genworth Financial, too, has applied for thrift status, but its application remains held up. A seventh insurer, Protective Life, received approval from the Federal Reserve to convert to a bank holding company.

Geithner has been coy thus far about whether he seriously intends to extend TARP funds to insurers, and even about whether he intends to continue the CPP at all. Even if he did, it's unclear how much money he could devote to the effort. Last week, Treasury disclosed it had about $134.5 billion left in the TARP, having already committed about 81% of the $700 billion program. Financial Services Roundtable President Steve Bartlett has suggested life insurers might collect out of a $250 billion fund President Obama has requested for future financial stabilization efforts, but those funds would require Congress to pass new legislation, and the AIG fiasco has made such an outcome highly unlikely in the near term.

Those legislative strains make it more likely the Fed will continue to be the source of the bulk of capital used for any further financial bailouts, using structures like the Term Asset-Backed Lending Facility. Treasury also has been moving away from direct capital injections, committing $100 billion to what could eventually become the $1 trillion Public-Private Investment Program unveiled last week by Geithner.

Insurers are eligible to participate in the PPIP, both as buyers and as sellers, and the program's Legacy Securities Program would appear to finally offer a means for companies to move illiquid residential and commercial mortgage-backed securities off their balance sheets. By offering a way to get the market in saleable securities moving again, and with the recent moves by the Financial Accounting Standards Board loosening some of the rules on fair-value mark-to-market accounting, the industry might finally be able to turn a corner on the losses it has been made to take on its investment books.

Ironically, then -- for a segment of the industry most prone to complain about the inefficiency of fragmented state regulation -- bureaucratic red tape associated with the lack of a federal regulator might have helped life insurers avoid a grave error. Preferred shares issued to the U.S. Treasury might be one product one ought not speed to market.

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