Did Life Insurers Benefit from TARP or Regulatory Forbearance during the Financial Crisis of 2008–2009?
The financial crisis of 2008 and 2009 witnessed large government bailouts of several life insurance companies worldwide, the most notable being AIG. Many have argued that AIG was unusual, and that the Treasury's opening up of Troubled Asset Relief Program (TARP) funds through the Capital Purchase Program to bail out U.S. life insurers during the spring of 2009 was unnecessary. They also argue that there was no change from normal behavior in life insurers' demand for capital during the crisis or the prior recession.
This paper is the first to provide direct evidence on whether, during the financial crisis, life insurers that were likely in need of capital support due to poor and deteriorating performance received more capital inflows or had a lower probability of financial distress if they were affiliated with an ultimate parent in receipt of TARP funds. It is also the first paper to provide evidence on the use of state-based regulatory forbearance for life insurers in the form of large and positive additions to reported capital and surplus from prescribed and permitted accounting practices (P&P) during the crisis and the previous recession.