As previously discussed here, here, here, and here, in enacting the Emergency Economic Stabilization Act (“EESA”), Congress authorized the United States Treasury to establish the Troubled Asset Relief Program (“TARP”). As part of the Treasury’s effort to inject capital into the credit markets, the Treasury initiated the Capital Purchase Program (“CPP”) as part of the TARP. Under the CPP, the Treasury purchases preferred shares and warrants from banks and other savings institutions to recapitalize their financial position. The preferred shares pay an annual interest rate starting at five percent. The warrants are exchangeable for shares of common stock, which allows the Treasury to profit as the participating company’s share price rises. Participants in the TARP must also accept limits on executive compensation and seek permission to declare dividends.
Under the EESA, the Treasury is authorized to invest in any financial institution, including insurance companies. But when the Treasury drafted it rules for spending the first $250 billion for recapitalization, the money was limited to banks and bank holding companies.
Treasury officials have stated that insurers with a federal regulatory link by holding a bank holding company charter or a thrift charter are already eligible for participation in the TARP. According to some insurance industry media sources, the Treasury will now accept applications for a bank or thrift charter at the same time an insurer applies for assistance under the CPP. Transforming into a bank, a step already taken by securities firms Goldman Sachs Group Inc. and Morgan Stanley, would also allow insurers to receive direct loans from the Federal Reserve.
While insurers meeting these requirements are eligible for participation in the CPP, it is still unclear whether the Treasury will provide them with any capital. Media sources have indicated that the Treasury is heavily considering their inclusion, fearing that the collapse of one or more major insurers could further destabilize the financial markets, because of the insurance industry’s involvement in backstopping a wide variety of financial transactions. Another reason for their inclusion is to level the playing field with several existing financial institutions that have already received assistance through federal guarantees, and therefore are at an advantage over insurers in attracting investors. To see the latest list of recipients of federal assistance, click here.
One insurance industry trade group, the American Council of Life Insurers (“ACLI”), has stated its support for the inclusion of the insurance industry in the CPP. Frank Keating, president and chief executive of the ACLI, said, “The life insurance industry is pleased to learn the Treasury Department is considering the inclusion of the life insurance industry in its Capital Purchase Program.” According to Mr. Keating, the CPP could boost the nation’s confidence in financial institutions, therefore ensuring that “consumers don’t delay acting on their financial and retirement security needs out of concerns prompted by current economic conditions.”
Meanwhile, Evan Greenberg, Chairman and Chief Executive Officer of ACE Group and Chairman of the American Insurance Association (“AIA”) released a statement declining to support the inclusion of property & casualty insurers in the CPP. Mr. Greenberg stated that a “substantial majority of the insurers represented by the AIA . . . are well-capitalized and well-positioned to weather the current financial market crisis without the assistance of the CPP.” Mr. Greenberg believes that property & casualty insurers who are members of the AIA will instead look to the private market to increase their capital if necessary and most will elect to not participate in the CPP. To see Mr. Greenberg’s statement, click here.
Industry sources have also revealed that there have been high level meetings between bond insurance executives and Treasury officials regarding the inclusion of bond insurers in the CPP. Proponents of bond insurer participation contend that it would ensure the stability of their customers, which include municipal bond issuers, and would help keep much needed credit available to them.