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.
Key Findings
- The paper establishes new evidence that insurers were under capital duress during the crisis in that they faced much greater odds of going into conservatorship, receivership, or liquidation in 2008 and 2009 than at other times and that these odds of capital duress were higher with deteriorating fundamentals, such as ROA, capital asset ratios, and liquidity ratios. In aggregate, life insurers in this sample, even excluding AIG's life insurers, experienced outright declines in both net income and unrealized capital gains in 2008.
- No life insurer in the sample belonging to a life insurance holding company system (LIHCS) in receipt of TARP funds experienced such insolvency issues, and life insurers with poor and deteriorating performance that belonged to a LIHCS in receipt of TARP funds received increased capital inflows during the crisis years. In contrast, life insurance entities with poor and deteriorating performance but with no access to TARP funds received a smaller dollar amount of capital injections on average during the crisis. Evidence on state-based regulatory forbearance due to P&P during the crisis indicates that such forms of state-based regulatory forbearance acted as a substitute for the receipt of TARP funds.
- Life insurers in aggregate experienced a very significant injection of capital during the crisis from a variety of proximal sources, including TARP funds (for some), regulatory forbearance in the form of P&P that had a positive impact on reported statutory surplus, and large internal capital inflows through capital contributions from, and reductions in shareholder dividends to, non-insurance parents. Both internal and total capital transfers were fairly widespread across the life insurance industry. On the other hand, positive contributions to reported capital and surplus from P&P are attributable more to the larger life insurance holding company systems (LIHCS) that applied for TARP funding.
Implications
The ample evidence that life insurers were in financial distress and were financially constrained, largely as a result of large investment losses during the height of the financial crisis, makes it questionable to take at face value the assertion that life insurers had no need during the financial crisis years for TARP funds or other forms of regulatory forbearance, given the extent to which external capital markets were frozen at that time.
Although a life insurance holding company system may have received TARP funds, it may not have needed them, and failure of a life insurer or the consolidated life group, in the absence of governmental or state-based regulatory support, may not have been a source of systemic risk. However, there were large operational and reputational costs to accepting TARP funds. If receipt of TARP funds is a reasonable indicator that the failure of a LIHCS may have had systemic consequences, then the fact that these LIHCS allocated TARP funds towards their poorly performing life insurers during the crisis suggests these life insurers were at high risk of failure and contributing to the likelihood of the LIHCS becoming a systemic problem.
While the results in this paper appear robust to a variety of approaches to estimation that should support interpreting these results as plausibly causal, still, as is common in economics, the natural experiment of receiving TARP funds is neither random nor exogenous. A less-ambitious interpretation of the results presented in this paper is that the financial crisis years were the random shock and that the results show only that life insurance entities and consolidated life groups with ultimate parents in receipt of TARP funds received greater capital inflows associated with poor and deteriorating performance on average than life insurers not in receipt of TARP funds.
Abstract
Life insurers' odds of being placed under regulatory control (for example, conservatorship or receivership) during the financial crisis years of 2008 and 2009 increased with deteriorating fundamentals at a much higher rate than during normal times or during the previous recession. However, no life insurer in the sample belonging to a life insurance holding company system (LIHCS) in receipt of TARP funds experienced such insolvency issues, and life insurers with poor and deteriorating performance that belonged to a LIHCS in receipt of TARP funds received increased capital inflows during the crisis years. In contrast, life insurance entities with poor and deteriorating performance but with no access to TARP funds received a smaller dollar amount of capital injections on average during the crisis. Evidence is presented of state-based regulatory forbearance due to prescribed and permitted accounting practices (P&P) during the crisis, and it is shown that such forms of state-based regulatory forbearance acted as a substitute for the receipt of TARP funds.