Life Insurers May Take A Pass On 1Q Charges As S&P Rises

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; [phone]; [e-mail]