Recent news reports indicate that the Treasury Department is considering expanding Congress' recently approved $700 billion bailout program to the insurance industry. The option currently favored involves buying stock in insurance companies adversely impacted by the current financial crisis and credit crunch.
The insurance industry has consistently opposed federal government regulation in its industry in favor of state regulation. However, media report indicate that some of the largest companies in the industry, including The Hartford
and Met Life
support – and have even lobbied Congress for – a share in the bailout.
What's going on?
The financial crisis affects all Americans: businesses and families. The insurance industry isn't immune. However, life insurance companies are more vulnerable to broad declines in stock prices than property-casualty companies. Here's why:
- Life insurers collect cash (premiums) which is invested primarily in long-term instruments (e.g. stocks). They accumulate huge stockpiles of cash which they invest and hold for a long time. . Because the companies don't plan to pay claims for several years (when the insured dies), they can invest in stocks, which are more volatile, but tend to outperform other investments in the long run.
- Property-casualty companies expect to pay claims much closer to the time they collect premiums (in the event of an accident or loss). So, their investments are much more conservative (usually bonds, t-bills and other secure instruments) and readily converted to cash in the case of a disaster.
The companies that are being mentioned in the bailout proposal are those with significant life insurance exposures in their product mix.
All of this reinforces some of the danger in starting down the slippery slope of government bailout of private businesses. All publicly-held companies compete with one another for funds in the capital market. They sell stock to the public. Their stock prices reflect the level and stability of their earnings potential: the higher the earnings per share, or the more reliable their projections, the higher their stock price. The higher their stock price, the higher their net worth. By bailing out banks, the government artificially boosted the stock price of publicly held banks, to the detriment of other businesses – including insurance companies.
Life companies were hit by both the declining value of their investment portfolios and the comparative disadvantage in raising capital when compared to the government-supported banks. Now, they're next in line with their hands out.