Monday, April 20, 2009
Are Insurers Next?-10
"The Treasury Department has decided to extend bailout funds to a number of struggling life-insurance companies, helping an industry that is a lynchpin of the US financial system, people familiar with the matter said. ... The news will come as a relief to a number of iconic American companies that have suffered big losses made worse by generous promises to buyers of some investment products. Shares of life insurers have fallen more than 40% this year. Their troubles led to a string of rating-agency downgrades that, in a vicious cycle, made it more difficult for some insurers to raise funds. ... If massive numbers of customers sought to redeem their policies, it could cause a cash crunch for some companies. ... The decision by the Treasury Department adds a third industry to the banks and auto companies that have already received bailouts from the government. ... Any life insurer that gets TARP funds will have to comply with strict executive compensation rules required by Congress. ... Hartford and Lincoln have applied for TARP funds. Genworth said it has applied with the Office of Thrift Supervision to approve its thrift purchase. ... Treasury had said last year that life insurers could be eligible for TARP funds if they owned bank-holding companies, but it hadn't officially decided to give funds to these companies as it focused much of its energies on banks and auto makers. ... Life insurers have been waiting several months to learn whether they would get federal funds. Many have resorted to contortions to bolster capital as they awaited word. Hartford recently said it plans to infuse $20 million into a cash-strapped Florida thrift it agreed to purchase for $10 million to qualify for federal aid under TARP", my emphasis, Scott Patterson and Deborah Solomon at the WSJ, 8 April 2009.
During the S&L crisis I saw home builders buy S&Ls to use the S&Ls to finance their construction on favorable terms. Look at the perverse incentives TARP has created for life insurers.