Paulson Weighs Stakes in Insurers, Regional Lenders

By Robert Schmidt

Oct. 24 (Bloomberg) -- The U.S. Treasury is considering taking stakes in insurers, as it prepares a new round of capital injections to target regional banks and other financial companies, a person briefed on the plan said.

A final decision hasn't been made on whether insurers will be included in the government's purchases of preferred equity, said the person, who spoke on the condition of anonymity. The Treasury, which had planned to announce investments in about 20 banks, reversed course and will let firms disclose their own share sales in coming days, the person said.

An initial $125 billion out of $700 billion approved by Congress was allocated last week to buy shares of nine of the largest U.S. banks and another $125 billion was set aside for smaller lenders. Investments in insurance companies would widen the scope of Secretary Henry Paulson's Troubled Asset Relief Program as the credit crisis deepens.

``Capital adequacy has been a major concern among investors'' in insurance companies, said Nigel Dally, an analyst at Morgan Stanley in New York, in a note to investors today. ``If the Treasury were to purchase preferred equity stakes in some insurers, it would help calm these concerns.''

Paulson has shifted the government's financial rescue program to focus on equity purchases after markets deteriorated faster than policy makers anticipated. The strategy offers a quicker way to deploy taxpayer funds, Neel Kashkari, the Treasury official running the bailout plan, told lawmakers yesterday.

Mandatory Participation

A group of insurance companies -- primarily life insurers -- asked the Treasury earlier this week if they would be eligible to participate in the program, said an industry official with knowledge of the discussion.

Some life insurers have asked the government to make the participation of life companies mandatory because firms don't want to identify themselves as needing funds, the person said.

Earlier today, PNC Financial Services Group Inc. said it is acquiring National City Corp. for about $5.2 billion in stock after getting a $7.7 billion infusion from the Treasury.

Regions Financial Corp. and First Horizon National Corp., the biggest banks in Alabama and Tennessee, respectively, said today they received preliminary approval to receive capital from the Treasury. Regions is selling $3.5 billion in preferred stock and warrants and First Horizon is slated for an $866 million injection, the companies said. Other regional banks may say that they have sold shares to the government in the coming days.

Banking Units

Under the Treasury's rules for the capital injection program, some U.S. insurance companies -- those with a banking business -- are eligible to request an equity investment from the TARP.

The rescue law requires that Treasury's investments be publicly revealed within 48 hours. It isn't clear whether that means from the time the bank is approved or from when it receives the funds.

Today, the Financial Services Roundtable, a trade association of the 100 largest banks, securities firms and insurers, asked Treasury to broaden its guidelines so that insurance companies, broker-dealers, automobile companies and institutions controlled by foreign banks could also sell stakes to the government.

``The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market,'' wrote Steve Bartlett, the group's president in a letter today to Kashkari.

45% Plunge

U.S. life insurance stocks have plunged about 45 percent in the past month on concern that losses on corporate debt and mortgage-backed securities will squeeze the firms' liquidity and force them to raise capital.

The Standard & Poor's 500 Insurance Index today rose 2.31, or 1.7 percent, to 139.66. The broader S&P 500 Index fell 31.34, or 3.5 percent, to 876.77.

MetLife Inc., the biggest U.S. life insurer, raised about $2.3 billion this month in a stock offering, and Hartford Financial Services Group Inc. said it would raise $2.5 billion from Allianz SE.

The largest insurers in the U.S. and Bermuda posted more than $93 billion in writedowns and unrealized losses on holdings tied to the collapse of the U.S. subprime mortgage market since the beginning of last year. Insurers invest policyholder premiums in bonds before paying claims.

AIG's Decline

American International Group Inc., once the world's largest insurer, accounts for about $48 billion of the declines.

AIG, which posted three straight unprofitable quarters because of bad bets on the housing market, agreed last month to turn over an 80 percent stake to the U.S. in exchange for an $85 billion loan. The New York-based insurer subsequently tapped a second federal credit line and has borrowed $90.3 billion.

AIG may need more than the $122.8 billion available, Chief Executive Officer Edward Liddy said Oct. 22 on PBS's ``The NewsHour With Jim Lehrer.''

Insurers including Allstate Corp., Prudential Financial Inc., Lincoln National Corp., MetLife and Travelers Cos. have suspended or scaled back share buybacks to shepherd capital as losses from fixed-income investments mount.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net