The Insurance Industry and the Great Recession Part II - Did the Federal Government Rescue the Insurance Industry During the Financial Crisis?

The common perception that the federal government bailed out the insurance industry during the financial crisis in the late 2000s is largely incorrect.
The first part of this article examined the public misconception, as illuminated by Peter G. Gallanis, President of the National Organization of Life and Health Guaranty Associations ("NOLHGA"), that widespread insurance insolvencies were part of the global financial crisis that occurred in the late 2000s, also known as the Great Recession.

Did the Federal government rescue the insurance industry during the crisis?
Another popularly-held but largely inaccurate belief, according to Gallanis, is that the federal government rescued the insurance industry during the financial crisis.[1] This misconception, along with the myth of widespread insurance insolvencies contributing to the Great Recession, has fueled legislative initiatives to escalate federal involvement in the regulation of insurance, which has long been a predominately state-run regulatory system.

Putting aside the former financial giant American International Group ("AIG") for the purposes of this discussion, Gallanis noted that several insurance companies did indeed receive a relatively small infusion of federal capital under the federal Troubled Asset Relief Program ("TARP"). The distinction is that the capital infusion is intended to keep insurance companies operating on the same keel rather than rescuing those in trouble, according to Gallanis.[2]

Generally, the insurance companies that took TARP funds were not on the verge of collapse.
In other words, the insurance companies that took TARP funds from the federal government were – generally – not on the verge of collapse and thus in desperate need of funds to keep them afloat. Rather, these insurers took advantage of the cheap money being offered through the TARP program to bulwark their capital and ensure that they continued to enjoy ongoing financial stability during a period of economic upheaval.[3]

More importantly, the number of insurance companies that received federal funds, and the amount of funds those companies received, was relatively minor when compared with the number of non-insurance financial institutions that failed and the trillions of dollars that were lost in the Great Recession, as well as the billions that the U.S. government paid out to keep companies like Citigroup and Bank of America afloat.[4]

Reports in 2009 said that six of the largest insurers were lined up to receive $22 billion in bailout funds
It was widely reported in 2009 that six "of the largest life insurers" were approved to receive "up to $22 billion in government money" under the Capital Purchase Program, part of TARP. The insurers referenced as lined up to receive TARP funds included: Genworth Financial. Inc.; Hartford Financial Services Group, Inc.; Lincoln National Corporation; Principal Financial Group, Inc.; Ameriprise Financial; and Allstate Corp.[5]

However, Genworth announced in late April of 2009 that it had missed a deadline to participate in the Capital Purchase Program, and therefore would not receive any TARP funds.[6]

Additionally, both Prudential and Ameriprise announced in May of 2009 that they were declining to participate in the TARP relief program.[1]

Then, in June of 2009, both Allstate and Principal Financial announced that they, too, were declining to participate in the TARP program.[8]

Only two of those large life insurers actually received TARP funds.
In the end, of the six large life insurers who publically announced as preparing to accept up to $22 billion in TARP investments, only two of them actually received relief funds. Moreover, the total amount of TARP funds disbursed to those two insurers was less than $4.5 billion.[9]

While $4.5 billion is a significant amount of money, it is still less than three percent (3%) of the $200 billion in funds invested by the U.S. Treasury Department as part of the Capital Purchase Program. Additionally, it is less than two percent (2%) of the $356 billion actually invested under the entire TARP program, and less than one percent (1%) of the 700 billion committed to TARP by Congress.[10]

The federal government spent as much as $3 trillion in recovery efforts
In addition to TARP, several other government initiatives pushed billions of dollars into the economy as part of the relief effort during the Great Recession, including the Federal Reserve rescue efforts, the Economic Stimulus Act of 2008, FDIC bank takeovers and other federal stimulus programs, as well as other financial initiatives. These efforts are estimated to have injected as much as $3 trillion in economic rescue efforts.[11]

Thus, when AIG is removed from the analysis, the facts suggest that only a minimal amount of the trillions of dollars that the federal government invested as part of its efforts to stem the Great Recession directly benefitted large elements of the insurance industry. Certainly, to the extent the federal recovery efforts might have lessened or cured the Great Recession, the insurance industry benefitted indirectly, but the common perception that the federal government rescued the insurance industry during the financial crisis in the late 2000s is largely incorrect.

Part III of this article will examine why life insurance companies seemed to be more susceptible to the financial strain from the Great Recession than other types of insurers.

1Seven Things We Know About Insurance and the Financial Crisis – That Aren't True, Peter G. Gallanis, NOLHGA Annual Meeting, October, 2011.
2Seven Things..., Id.
3What Insurance 'Bailout' Means for Your Policy, Russell Goldman, ABC News, April 9, 2009.
4Bailout RecipientsProPublica, December 12, 2011.
5Six insurers cleared to accept TARP money, Sam Mamudi, Alistair Barr, MarketWatch, May 15, 2009.
6Genworth not participating in Capital Purchase Program, Wallace Witkowsk, MarketWatch, April 09, 2009.
7Prudential, Ameriprise turn down TARP, United Press International, Inc., May 16, 2009.
8Principal Financial declines participation in TARP, Wallace Witkowski, MarketWatch, June 11, 2009; Allstate Declines TARP Bailout Funds Jonathan Stempel, John Wallance, Reuters, May 19, 2009.
9Bailed Out Banks,'s Bailout Tracker, David Goldman,'s Bailout Tracker, Id.

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