After a long delibration, the Treasury recently confirmed that it would allow certain insurers to access the TARP. Many firms like Hartford Insurance (HIG) and Lincoln National had gone as far as snapping up small thrift banks in order to quality for it.
Now there’s been some fear of a run on insurance companies. Holders of life insurance could create a real mess if they demanded to redeem their policies en masse. And of course insurance companies, along with pensions, are among the big holders of bank debt, which is the real reason the government won’t let bank bondholders take any kind of haircut.
But Breakingviews argues that far from being a bailout of the insurance companies customers, access to TARP capital is basically just a subsidy to shareholders.
Moreover unlike banks low capital levels don’t make insurers implode dramatically. An undercapitalised bank often takes lots of high-risk gambles in the hope one will pay off. This saddles taxpayers with losses when the gambles fail. In contrast undercapitalised insurers usually have trouble attracting new business because clients fear they won be able to honour their policies. In any case most insurance companies claim they are well capitalised. US life insurers on average have three times required capital.This leaves getting lending going as the remaining rationale. Insurers are big buyers of everything from corporate bonds to more esoteric investments. But they have pulled in their horns over the past several months and are pushing more money into Treasuries. Cheaper funding hardly seems the way to reverse this. Also insurers favour high quality debt for which there already sufficient demand. If insurers are solvent and policyholders have nothing to fear then government capital injections are nothing more than subsidies to their shareholders.
Looked at through this lens, TARP for insurers is less about bailing out insurers and more about turning TARP into a TALF or PPIP-like program, one designed to subsidise a private market in certain assets. Doing it via insurance companies seems like a rather roundabout and dishonest approach.