The Treasury Department recently announced that it has decided to extend federal bailout eligibility to struggling life insurance companies. Treasury officials are reviewing applications from about a dozen large insurance companies seeking a share of what is left of the Trouble Asset Relief Program (TARP) after the financial and auto industry bailouts. The insurance companies play an important part in US finance and their collapse poses a huge risk to the financial system. The life insurance industry is one of the largest investors in the corporate bond market, holding approximately 18 percent of all US corporate bonds. They also have large stakes in commercial real estate and government bonds. Some of the companies expected to benefit from this bailout include Hartford Financial Services Group (HIG), Lincoln National Corporation (LNC), Prudential Financial (PRU) and MetLife (MET).
Hartford Financial Services Group (HIG) is one of the largest investment and insurance companies in America with annual revenues of $25.91 billion in 2007 and $9.21 billion in 2008. Hartford has suffered serious losses in the current market, recently reporting an $806 million quarterly loss and 2009 earning estimates below expectations. HIG’s stock has seen gains since the Treasury’s announcement.
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Lincoln National Corporation (LNC) is another insurance investment company that has experienced investment losses in recent quarters. Their annual revenue in 2008 dropped to $9.88 billion from $10.59 billion the previous year. The company bought a small savings and loan in order to qualify for the federal bailout. Lincoln applied for the federal program in November pending its approval as a thrift-holding company. LNC announced on April 7th that it repaid a $500 million debt maturity and plans to repay $200 million of commercial paper as it matures over the next several weeks in order to stave off a liquidity shortfall. Lincoln has slashed dividends and is looking for other ways to build capital after these payments. Lincoln CEO Dennis Glass’ compensation fell 60% in 2008, another sign of the companies troubles. Lincoln’s stock rose 33% with the announcement of the potential bailout.
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Prudential Financial (PRU) already owned a thrift prior to the credit meltdown and so already qualified for the bailout and, like Hartford and Lincoln, Prudential applied for funds months ago. Prudential is a well-known insurance company with approximately $558 billion of assets under management at the end of 2008. Prudential saw annual revenues fall more than $5 billion between 2007 and 2008 from $34.4 billion in 2007 to $29.27 billion in 2008. The company reported a net loss for its Financial Services Businesses of $1.096 billion for 2008, compared to net income of $3.512 billion for 2007. Prudential’s common stock was at $79.74 this time last year. Prudential’s stock has been rising since the announcement from $21.50 on April 7th to $27.50 at closing on the 9th.
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MetLife (MET), the countries largest life insurer, declined to receive bailout money but has made gains in the stock market since the Treasury’s announcement along with the other insurers. On Wednesday, MetLife sold $230 million of two-year GIC backed notes.
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Just as someone can purchase life insurance, homeowners insurance or automobile insurance, investors can purchase “stock insurance” with stock options. A put option provides insurance for a stock in the event of a significant drop in stock price. Many investors consider a stop loss as a method for preventing large losses, but many times a stock may open down well below a stop loss and a larger loss is experienced than expected. Combining a protective stock options strategy, married puts for example, with an income generating stock options strategy, covered call investing, can provide income with capital preservation.
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[tags] Treasury Department, Trouble Asset Relief Program, TARP, life insurance, bonds, real estate, Dennis Glass, life insurance, homeowners insurance, automobile insurance, HIG, Hartford Fin. Srvs. Group Inc., LNC, Lincoln National Corp., MET, MetLife Inc., PRU, Prudential Financial Inc. [/tags]