Marketplace Scratch Pad

For the life of me

Scott Jagow Mar 12, 2009

Life insurance companies have been at the back of the bailout line, but their number might get called soon. The Wall Street Journal reports today that a dozen life insurers “have pending applications for aid from the government’s $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the coming weeks.”

The Journal says a weakened life insurance industry could have ramifications for the whole economy. Not AIG style, but:

Any sign of vulnerability among life insurers could further erode confidence and make jittery consumers reluctant to buy insurance products, analysts and financial advisers say. “I get as many emails from subscribers who worry about their policies as they do about their stock,” said Morningstar analyst Alan Rambaldini, who covers life-insurance companies.

Plus, life insurance companies buy a lot of bonds. If they stop buying them, the capital markets may have a tougher time recovering.

The good news for life insurance companies is that they still make money from their premiums,
and they don’t have to keep raising money to run the business. In fact, by hoarding premiums, many life insurance companies have built up cash reserves. They may need that money if the stock market keeps going down. They still have to meet guaranteed investment returns for people with variable annuities.

From the Journal:

The problems plaguing life insurers aren’t the same as those at insurance giant American International Group Inc., which has received a $173 billion aid package. Its losses stemmed largely from derivatives, primarily credit default swaps, tied to complex securities that turned sour in the credit crunch. Life insurers’ woes have come largely from investment-grade corporate bonds, commercial real estate and mortgages, regulatory filings show.

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