Life insurance companies are snapping up small savings and loans in a bid to make themselves eligible for big government bailout dollars, but the effort is fraught with complications.

Lincoln National ( LNC), Genworth Financial ( GNW) and Aegon ( AEG) this week joined Hartford Financial Services ( HIG) in making deals for S&Ls.

The deals and the insurers' accompanying applications to become thrift holding companies are aimed at helping the companies qualify for money through the Troubled Assets Relief Program, or TARP, which is investing $250 billion in preferred equity stakes of banks and thrifts. TARP's purpose was to shore up confidence in the banking system by providing the government's backing and to hopefully inspire the institutions to begin lending again.

But the relatively small size of the deals hardly seem to merit the aid the insurers are expecting. The Hartford agreed to buy Federal Trust, which had $602 million in assets as of Sept. 30, for $10 million, but believed it was eligible for as much as $3.4 billion in Treasury money. Lincoln National expects to be eligible for $3 billion in TARP money if its deal for Newton County Loan & Savings -- with just $7 million in total assets -- is approved.

Who's Minding the Store?

Treasury Secretary Henry Paulson, who reluctantly endorsed a hefty federal bailout of American International Group ( AIG) prior to Congress' passage of the TARP, has recently seemed resistant to expanding federal bailout efforts.

But even if Paulson or his successor when President-elect Barrack Obama takes office in January comes around to the idea of bailing out the insurers, there are thorny issues to be dealt with in terms of regulation.

"I think it's clear that Treasury has made a decision that aligning insurance companies into federal oversight is a good policy," says Frank Mayer III, an attorney with of Buchanan Ingersoll & Rooney specializing in advising companies on relationships with governments and government agencies. "They are only providing capital if the insurance companies are willing to become part of a federally regulated regime. "

While subsidiary insurance companies would still be regulated by the states, the holding companies would be regulated on the federal level. A turf battle among potential regulators will likely accompany federal approval of the insurers' move into the S&L business. This could be similar to the "preemption" battle between the Office of the Comptroller of the Currency, which supervises national banks, and the states, which were thwarted in efforts to curb the activities of non-bank mortgage subsidiaries held by national banks, during the housing boom.

It's reasonable to expect OTS to approve the life insurance companies' applications to convert to S&L holding companies before the end of the year. Since the insurers would be hurt quite badly if their applications were rejected, it is likely they received some assurances from the regulator and possibly from members of Congress.

Mo Money, Mo Problems

Before announcing its deal for Federal Trust, The Hartford posted a $2.6 billion third-quarter loss. Lincoln National remained profitable in the third quarter, although its $148 million in profit was down 55% year-over-year, mainly due to a $314 million in losses on derivative investments.

Newton County Loan & Savings (set to be acquired by Lincoln National) remained strongly capitalized, with a leverage ratio of 15.09% and a risk-based capital ratio of 21.46% as of Sept. 30. However, its nonperforming assets, including loans past due 90 days or more and repossessed real estate, comprised 20.22% of total assets.

The nonperforming assets are mainly repossessed one- to four-family homes, which hopefully doesn't present a major threat to capital. The scary thing for Newton County is that loans delinquent 30 to 89 days represented another 17.56% of total assets. Any acquisition deal is a good one for this institution.

Genworth Financial posted a net loss of $258 million for the third quarter, on net investment losses of $816 million. The company has agreed to purchase InterBank FSB, of Maple Grove, Minn., a thrift with $858 million in total assets as of Sept. 30.

Like so many thrifts, InterBank has suffered mortgage quality problems over the past year, and the institution posted five straight quarterly losses through September. Nonperforming assets comprised 5.84% of total assets. Loans delinquent 30 to 89 days comprised another 1.96% of total assets. The thrift's net charge-offs for the third quarter totaled $11.7 million.

Loan loss reserves as of Sept. 30 totaled $9.4 million. The bank was still considered well-capitalized per regulatory guidelines as of Sept. 30, with a risk-based capital ratio of 10.11%, but another quarter of declining loan quality or similar charge-off activity could cause the institution to slip below the 10% required for a well capitalized institution.

Genworth didn't say how much TARP money it expects to qualify for.

Reuters reported Tuesday that Aegon was also seeking thrift holding company status, to qualify for more than $1 billion in government money. The Dutch company, which holds Transamerica, was said to be considering the purchase of troubled Suburban Federal Savings of Crofton, Md., which had $354 million in total assets as of Sept. 30.

Aegon reported a third-quarter net loss of 329 million euros ($425 million when announced), from impairments related to Lehman Brothers and Washington Mutual, as well as asset-backed securities.

Like InterBank, Suburban Federal has posted five straight quarterly losses, with problem loans rising to even more alarming levels. The institution's ratio of nonperforming assets to total assets was 13.71%. According to its third quarter call report, which is still subject to revision, Suburban Federal was considered critically undercapitalized per regulatory guidelines, since its tangible equity ratio was just 1.33%.
Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.