The US Treasury has recently decided to provide the long awaited federal assistance to the life insurance companies; thereby, strengthening a pillar of the US economy.
According to the people associated with the matter, the US Department of Treasury has taken decision to extend bailout funds to several struggling life insurance companies in an attempt to help one of the key players of the US financial system, as reported by THE WALL STREET JOURNAL.
According to the American Council of Life Insurers, insurers own 18% of total corporate bonds outstanding. While life insurers waited long to know whether they would be benefited by federal funds, several of them resorted to contortions to boost the capital. One of the insurers Hartford Financial Services Group Inc. recently said that it was planning to infuse S20 Million into a Florida thrift which it agreed to purchase at $10 Million to become eligible for federal funds under the Troubled Assets Relief Program (TARP).
Insurance companies in the US have been waiting for around six months after being informed in November 2008 that they could file their application for the TARP funds, provided they had a federally regulated affiliate. Many insurance firms instantly purchased thrifts so as to obtain their federal agreements.
Additionally, some of the biggest insurance companies in the US are waiting to receive loan from the government and most of them purchased thrifts or small banks, hoping that this would make them eligible to get federal aid. These insurance giants include the Prudential Financial, Lincoln Financial and Hartford Financial.
Furthermore, insurers looking for the government loans will have follow the rules and regulations, including regulations on executive compensation. Moreover, No CEO of TARP participant will be eligible to earn over $500,000 in salary.
In case, a large number of customers look to cash their policies, this could result in a cash crisis for some of the companies. As insurers invest the premium from customers into real estate, bonds and various other investment schemes, they are the major security holders. And if they sell off their holdings for cash, it could lead to the tumbling of the market.
According to a Research Analyst at RNCOS, “The insurance sector has been considered an important part of the financial system. Millions of people in the US have assigned the financial safety of their families to the insurance firms. Hence, to maintain their confidence, it’s important to keep insurance companies rolling in their businesses.”
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