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US Offers Life Insurance to . . . Life Insurers

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By Kevin Fayle on April 08, 2009 12:10 PM

The US government will extend money from the Troubled Asset Relief Program (TARP) to life insurance companies in the next few days, according to a report in the Wall Street Journal.

If the move does in fact happen, the insurance companies will join the financial services industry and the auto manufacturers as the three industries that the government has deemed important enough to the overall economy to warrant bailouts. 
According to the WSJ report, the reasoning behind the move is twofold: first, millions of Americans rely on the companies to secure their families' financial future.  Keeping the companies solvent is important to maintaining overall confidence in the US economy (what's left of it, anyway.)  It's unclear how companies taking bailout cash conveys the message of stability and security, but that doesn't appear to concern the markets, where insurer stocks are up so far today.

Second, insurance companies back up their obligations to their customers by purchasing bonds, real estate and other investments.  Thus, they are major holders of securities.  If customers lose confidence in the companies and start a run to redeem their policies, the insurers would have to sell off their investment assets to raise cash.  This could push markets down even further and stop any recovery in its tracks.

Plus, many companies have been hoarding cash already to satisfy what may have been overly-generous promises to annuity holders after the markets tanked and the companies lost large amounts of value along with everyone else.  That hoarding has kept the companies from buying investment assets like they used to, and the government hopes that by easing the industry's cash worries they'll get back in the markets and help the recovery.

The TARP money would only be available to those insurers who own a federally chartered bank.  Several companies have seen the writing on the wall and already purchased or made moves to purchase banks.

The executive compensation rules required by Congress would also come into play.  Whether that's enough to stave off the public outrage that's accompanied the other bailouts remains to be seen.

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