Share prices for life insurers rose Wednesday after the Treasury Department said a number of life insurers have met the requirements for getting funding under the government's Troubled Assets Relief Program, designed to stabilize the financial system. The Treasury says those applications are under review.
A number of insurers could use the money because they've suffered losses in the financial markets. The companies invest the premiums they collect and use the proceeds to pay out claims. Investment losses have led ratings firms to downgrade some insurance companies, making it more difficult for the insurance companies to borrow money and attract capital.
Also, a number of the companies provide retirement annuities and have guaranteed payment to retirees. The losses on their investments could strain their ability to pay and undermine confidence.
The Treasury may decide to inject TARP funds into some of the companies to help maintain confidence and to shore up the industry's role in the nation's credit markets.
Life insurers are big providers of credit to corporate America because they buy huge amounts of corporate bonds — the insurance industry holds 18 percent of all corporate bonds. The government uses TARP funds to buy preferred shares in some of these struggling companies, giving them a bigger cushion against losses — making them more financially stable and able to provide credit to the corporate sector.
Insurance companies have access to TARP funds because many of them own banks, or savings and loans. That makes them federally regulated financial companies, the group that's eligible for TARP funds. In fact, some insurers that didn't own banks or thrifts bought them last fall just so they could qualify.
Talk of the use of TARP funds for insurance companies brings to mind the government's controversial rescue of American International Group Inc. The government has committed more than $170 billion to AIG, part of it from the TARP.
The Treasury suggests that the amounts of government funds for life insurers would be quite modest by comparison. For example, Hartford Financial Services Group said it would be eligible for somewhere between $1.1 billion and $3.4 billion of TARP funds if the Treasury accepts its application.
It's also worth remembering that AIG got rescued not because its insurance subsidiaries got in trouble, but because it had a financial products division that took huge gambles with credit default swaps. Those bets went bad, and the government feared the fallout could bring down not only the company, but the whole financial system.