Treasury Weighs Investment in Life Insurers
Thursday, April 9, 2009
The Treasury Department is considering opening another front in the effort to manage the financial crisis, saying that some life insurance companies qualify for a potential investment of taxpayer dollars.
Treasury has determined that a small number of insurers are eligible for funds under the Troubled Assets Relief Program, and it is evaluating their requests on a case-by-case basis using the same criteria it applies to banks.
"These are among the hundreds of financial institutions in the . . . pipeline that will be will be reviewed and funded as appropriate on a rolling basis," Treasury spokesman Andrew Williams said yesterday by e-mail.
Although Congress last year granted the Treasury the authority to buy stakes in life insurers, the department has been slow to do so, partly because the federal government does not regulate life insurance companies and has limited ability to monitor their financial condition. Life insurers are regulated by the states.
To make sure that the federal government had at least a limited window into the affairs of TARP recipients, the Treasury declared last year that insurers would qualify only if they owned banks or thrifts, which would put their holding companies under the purview of Washington regulators such as the Office of Thrift Supervision. To meet that test, some insurers bought thrifts. Still, during the Bush administration, Treasury officials warned that such maneuvers might not be sufficient.
Now, the Treasury Department appears to have gotten past some of the earlier qualms.
"There are a number of life insurers who met the requirements for the Capital Purchase Program because of their thrift or bank holding status and applied within appropriate deadlines," Williams said.
The Wall Street Journal reported yesterday that the Treasury has decided to extend bailout funds to a number of struggling insurers. The Treasury didn't go that far in its public comments yesterday, and industry officials said they were unaware of such a decision.
TARP money could help keep insurance companies out of financial trouble and could enable them to provide greater support for the broader economy.
Insurers help fund American business by plowing money into an array of investments, such as corporate bonds, home mortgages and commercial real estate loans. The recession has eroded the industry's financial strength and left it vulnerable to further deterioration.
The result is that insurers could be forced to raise cash by selling assets at depressed prices and to raise capital at great cost. Making matters worse, as the bonds they hold are downgraded by credit rating agencies, it becomes harder for them to maintain the financial cushions regulators require to safeguard policyholders.
Taking capital from the government could ease the pressure, but it could also dilute the value of current shareholders' stock and subject the insurers to government restraints.
State regulators have tried to give relief to many insurance companies in recent months by changing how they measure capital and reserves. Instead of giving companies more capital, the state actions give insurers the appearance of more capital.
The Obama administration has proposed creating a federal regulator that would oversee institutions that have the ability to threaten the financial system, including insurers. The Treasury appears willing to give the insurers money even without that backstop in place.
"I surely hope they have the ability to see what they're getting into," said Peter Larson, an analyst at Gradient Analytics, adding that the capital needs of some insurance companies may be greater than meets the eye.
For insights into the financial condition of insurers seeking TARP funds, the Treasury has been talking to state regulators, said Therese M. Vaughan, chief executive of the National Association of Insurance Commissioners.
Vaughan predicted an increase in insurance company failures, but she said she doesn't expect any major insurers to fail and she doesn't expect widespread failures. She predicted that an industry safety net would be capable of handling any insolvencies that arise.