Insurers to Get TARP Money

Insurance stocks were up big in morning trading on news Treasury will make them eligible for TARP.  (WSJ)

The Treasury Department has decided to extend bailout funds to a number of struggling life-insurance companies…

The department is expected to announce the expansion of the Troubled Asset Relief Program to aid the ailing industry within the next several days….

How much money would now be available to the insurers, and which particular insurers would be beneficiaries, remains unclear. The Treasury says it has about $130 billion remaining in TARP money.

The article sums up the problem facing insurers:

These companies got into trouble for two main reasons, both tied to the weak financial markets.

First, many of the roughly two dozen insurers that dominate the variable-annuity business made aggressive promises on these popular retirement-income products, guaranteeing minimum returns, no matter what happened to the stock market. With the market’s decline, the issuers are on the hook for big payouts, though most of the payments won’t come due for 10 or more years. Second, the insurers also have lost money on the investments in bonds and real estate that back their policies.

Insurers own 18% of all corporate bonds outstanding…

Stockholders are not out of the woods.  TARP capital is unlikely to solve the underlying problem of solvency that faces much of the insurance sector over the long-term.  As large holders of bank debt, insurers and their stockholders do benefit a great deal from the implicit government guarantee that bank creditors will be made whole.  But as losses mount, that guarantee may become untenable.  And insurers are likely nursing billions in other losses that are being hidden with accounting shenanigans.

It’s hard to see how the life insurance industry survives long-term without some sort of bad bank solution to rescue them from “toxic” assets.

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