Advisers cautious on insurers OK''d for TARP money

Although carriers' acceptance into the TARP program has led to share price gains and cautious approval from ratings agencies, some financial advisers are still keeping the insurers' products and securities at arm's length. “It looks like the government won't let them fail, but we're not at the point where we recommend that clients go and purchase stocks and bonds,” said John Sullivan, an adviser with World Equity Group Inc., an Arlington Heights, Ill., firm that manages $1 billion. This month, six major carriers received the Department of the Treasury's blessing for entry into the Capital Purchase Program, part of the Troubled Asset Relief Program. They are Allstate Corp. of Northbrook, Ill., Ameriprise Financial Inc. of Minneapolis, The Hartford (Conn.) Financial Services Group Inc.; Lincoln National Corp. of Radnor, Pa.; Principal Financial Group of Des Moines, Iowa, and Prudential Financial Inc. of Newark, N.J. Allstate and Ameriprise took a pass on federal government aid within days of approval, while speculation over which of the four remaining insurers will take the help continues. For some advisers and their clients, a cloud of suspicion hangs over the companies that applied for federal aid amid the stock market's fall and fear surrounding the near-collapse of American International Group Inc. of New York.
Delia Fernandez, president of Fernandez Financial Advisory LLC of Los Alamitos, Calif., keeps one eye on carrier-issued bonds and the other on her clients' 403(b) plans, which use annuities from The Hartford. Most of her clients are teachers. “A client just sent me an e-mail about The Hartford, a big player in 403(b)s, so what do I tell her?” asked Ms. Fernandez, a fee-only adviser. “Do I say, "For now, you're OK, but wait for my call so that we can switch out?'”

ANXIOUS CLIENTS

Her clients' fears are further compounded by the fact that California's guaranty association will cover only 80% of the first $100,000 in an annuity and 80% of the first $250,000 in a life policy in the event that a carrier becomes insolvent. As a result, Ms. Fernandez, whose firm manages $20 million, has been conferring with colleagues who sell insurance to find out whether they still feel confident selling The Hartford's products. So far, they do, she said. Still, Ms. Fernandez said, asset diversification and 1035 exchanges — when sensible — have become a bigger topic of conversation with clients. For exchanges, she turns to fee-only-friendly annuity providers such as Ameritas Life Insurance Corp., TIAA-CREF and The Vanguard Group Inc. One adviser also doesn't differentiate between Allstate and Ameri-prise, which ended up declining the government lifeline, and the other four companies that appear likely to accept the funds. “On the surface, it's a smart decision on their part to not take it. I think on a certain level, they're accepting personal responsibility,” said Mitchell Dannenberg, president of LTCI Marketplace in Miromar Lakes, Fla. But “any company that allows itself to become subject to a government aid program, on a certain level, that's a concern,” he said. “How did your ship get that far off course? Who's at the helm? Who said, "Let's take this amount of exposure in these equities, bonds or real estate'? Someone wasn't doing their homework,” Mr. Dannenberg added. Others are more sanguine. Jay F. Butler III, a senior associate with Bay Financial Associates LLC, recently had a client proceed with a variable annuity from Prudential. His Waltham, Mass.-based firm manages $750 million. The investor didn't seem terribly worried about Prudential's acceptance into TARP, and Mr. Butler explained that he felt the insurer is “solid” and that acceptance into the federal aid program doesn't mean that the company will take the money. “I don't think [TARP] had a significant impact one way or another on the client's decision,” Mr. Butler said. “But with the knowledge of Prudential's history and current state of affairs, he felt comfortable moving forward with my recommendation.”

JUST ONE FACTOR

Others view the prospect of TARP participation as only one factor when they evaluate insurers. Mr. Dannenberg puts greater weight on the carrier's financial ratings and whether the insurer offers a product that is appropriate for a client's needs. The firm doesn't manage assets, but it sells long term care, life and disability insurance. Mr. Dannenberg has written business with Lincoln National and Prudential; he thinks that their financials indicate that both have strong reserves. Still, a TARP insurer wouldn't necessarily be his first choice for clients. “These are all good companies. But if I had a choice between going with a TARP company and one that didn't apply — and if there were no appreciable differences in coverage — I'd go with the one that didn't get the money,” Mr. Dannenberg said. On the investment side, some advisers said that their clients are beginning to calm down and regain some confidence in the insurers. “I think a lot of people have started to see the glass as half full and not half empty,” said Jim Weil, a partner at Financial Strategy Network LLC in Chicago. The firm manages more than $500 million. Whether a company has applied for TARP funds hasn't affected the way Mr. Weil sees the companies' insurance products, as he thinks that the companies are sufficiently capitalized and are capable of meeting claims. However, some of his clients hold small positions in the actual stock of insurance companies. “We try to make sure nobody has large concentrations in any one stock without protection, such as a simple stop-loss or a collar to hedge the risk,” Mr. Weil said. “We haven't been actively trying to trade in with that market.” Between the Treasury Department's May 14 announcement and market close last Wednesday, share prices of the four carriers still in the running for the approved TARP money soared. The Hartford led the way with a 25% gain, Lincoln climbed 16.78%, Prudential scored a 10.1% gain, and Principal rose 8.95%. The rise in stock prices for the TARP-accepted carriers hasn't been enough to sway Mr. Sullivan into recommending that clients invest in those companies. One of his clients had bonds with a TARP insurer and sold them. Another client has a fixed annuity with The Hartford that will soon come due. “The insurance companies will go up, but why buy their stocks or bonds when you can buy something diversified?” Mr. Sullivan asked. “I would stay away from the sector for the time being.” Others aren't pulling clients out of the companies, but they aren't altogether comfortable with them, either. “I wouldn't suggest a client move his investments in these income guaranteed products just on speculation that a company could file bankruptcy or go out of business,” said Jerry W. Taylor, a division manager, located in Lewisville, Texas, with NEXT Financial Group Inc. a broker-dealer based in Houston. He said he has been cautious about placing new clients with TARP--petitioning carriers but won't pull current investors from variable annuities with those companies as that could prove detrimental to them. “That's the risk. What I don't know, I don't know, and I can't speculate with other people's money like that,” he said. E-mail Darla Mercado at dmercado@investmentnews.com.