Financial Reform Watch

Participation by insurance companies in the TARP program appears to be back on the front burner at Treasury. However, eligibility standards for receiving assistance and the requirements that come along with it are very much under discussion.

Back in the fall , several big-name insurance companies rushed to make the November 14 deadline to apply for assistance from the TARP program. A few were in the news for buying small banks or thrifts in order to qualify for TARP funds, since only federally regulated deposit institutions are eligible for the TARP’s Capital Purchase Program. (AIG has its own special category for TARP assistance—Systemically Significant Failing Institutions.) But as November turned to December it became clear the Bush Administration was not going to move on assistance to insurers.

Now, almost five months later, some life insurance stocks are seeing significant gains on rumors that Treasury is about to provide billions of bailout dollars to their companies.

The guiding principle in the government’s economic stability program has been to prop up institutions whose failure would pose systemic risk to the economy. With over $1.5 trillion invested in corporate bonds—18 percent of the total outstanding according to the New York Times—and hundreds of billions invested in commercial mortgage backed securities, the administration can certainly make the case that life insurers as a group provide critical liquidity to the economy.

It is when individual companies are assessed as potential recipients of TARP aid that questions arise. What kind of stress test will be administered to insurers to determine who needs help? What about those life insurers that did not buy a bank but are still facing the same market pressures as those that applied for TARP money? What executive compensation limits will apply?

With so many considerations, it is not surprising that it has taken the Treasury more than five months to make a decision. We are expecting news shortly on Treasury's plans for insurers and will track it closely.