Insurance and Financials: Government Programs Pushing Recovery into the Future

This is getting monotonous. Instead of singing, “Oh, say, can you see by the dawn’s early light?,” we’re going to be singing, “Day-O! Daily come and I wan’ go home.” Now that the administration is pitching a power-sharing agreement with the Taliban in Afghanistan, it can be Mr. Taliban who will tally me banana.

Five of the six top performers in yesterday’s little bounce-back were insurers, not surprising, given that six insurers are getting TARP money. Hartford (HIG) was up 17.4% to $14.75 as of the close (click to enlarge), and was up another 10% after the close following the announcement that TARP funds were coming.

Hartford Investment Group Stock Performance, Five Days

May 14 (Bloomberg) — Prudential Financial Inc., Hartford Financial Services Group Inc. and Allstate Corp. are among six insurers approved by the U.S. government for bailout funds after investment declines eroded capital across the industry.

Hartford won preliminary approval for $3.4 billion from the Treasury Department’s capital purchase program, the Connecticut- based insurer said today in a statement. A person familiar with the matter said five other carriers won preliminary approval, including Lincoln National Corp., Principal Financial Group Inc. and Ameriprise Financial Inc.

Life insurers applied for government bailouts last year as the recession pushed down the value of corporate debt and mortgage investments held to back policies. Ratings downgrades and stock declines across the industry made it harder for insurers to raise money from private investors.

The Treasury funds “would further fortify our capital resources and provide us with additional financial flexibility during one of the most volatile market climates in our nation’s history,” Ramani Ayer, Hartford’s chief executive officer, said in the statement.

This is just grand. First the Obama administration pulls the rug out from under the insurance industry by playing politics with credit seniority in the Chrysler bankruptcy, adding to the uncertainty of valuing trillions of dollars of corporate and commercial real estate debt. It then offers a bailout to the investors.

It’s not just Chrysler, of course: it’s the fact of loan modification that skims money for the servicers and starves the subprime pools, it’s the threat of cramdown in mortgages, it’s an administration that is applying banana republic finance techniques. There is a reason that subprime home equity AAA’s are trading at 27 cents on the dollar — that’s what you would get if you have 100% defaults and a 27% recovery rate (click on chart to enlarge). It’s practically impossible for things to get that bad, so there must be another explanation. And there is: the threat of government programs pushing recovery into the distant future and diverting cash flows away from bondholders makes this asset class extremely uncertain.

Price of ABX AAA Index for 2007 Second Half Vintage (Source: Markit Partners)

There is a lot less reason to hold the financials now then before Chrysler. I advocated taking profits when Bank of America (BAC) traded above $14 and Citigroup (C) traded above $4. The distressed investing (”Zombie”) scenario I projected to keep them profitable is much less certain given the administration’s penchant for breaking glass in the credit markets.

By the way: Is Jim Cramer reading this blog? This sounds awfully like what I posted Tuesday night:

If you are on the lookout for “tell” stocks that give you a perspective on when the market’s awful or great, look no further than the insurers, which seem to give you the skinny from the get-go. If you monitor Lincoln, Genworth — wow, that one’s something — Hartford, Principal and Prudential, you pretty much get the best read possible because of the potent combination of poor reserves (always denied), terrible portfolios (especially commercial real estate, which is always harped as great by the companies) and underwater annuities (always presumed by the companies to not be a worry).

It’s embarrasing to sound like Cramer, whose style offends me, and whose track record is miserable.

Comments

[Jasper M:]

Good article.

May 15 01:55 AM

[TeresaE:]

Another shoe is dropping and

Wall Street Rejoices once again and "green shoots" are cropping up all over.

Fools.

Look at real data and Zimbabwe, then rejoice.

We are so a banana republic.

May 28 05:06 PM

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[philip1111:]

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May 28 10:02 PM

[philip1111:]

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May 28 10:02 PM