Another Mistake: Bailing Out Life Insurers

I read with horror earlier this week that the federal government has decided to bail out at least three large life insurers- Hartford, Lincoln and Genworth. All three had quickly acquired small S&Ls or banks last fall, in order to get their snouts into the federal TARP trough.

Reading the Wall Street Journal piece announcing this development, I was sickened to learn,

"The news will come as a relief to a number of iconic American companies that have suffered big losses made worse by generous promises to buyers of some investment products. Shares of life insurers have fallen more than 40% this year. Their troubles led to a string of rating-agency downgrades that, in a vicious cycle, made it more difficult for some insurers to raise funds.

Life insurers had for a time seemed to be somewhat immune from the credit crisis, since they tend to invest in relatively safe assets in order to match their liabilities. These companies got into trouble for two main reasons, both tied to the weak financial markets.

First, many of the roughly two dozen insurers that dominate the variable-annuity business made aggressive promises on these popular retirement-income products, guaranteeing minimum returns, no matter what happened to the stock market. With the market's decline, the issuers are on the hook for big payouts, though most of the payments won't come due for 10 or more years. Second, the insurers also have lost money on the investments in bonds and real estate that back their policies.

Many life insurers also hold large portfolios of residential mortgage and commercial real-estate assets. While most of the assets are highly rated, further downgrades of those assets could put considerable pressure on insurers, forcing them to take additional write-downs."

So, basically, life insurers, as they seem to do once every few decades, sold products which promised returns they cannot deliver. And consumers were stupid enough to buy these.

Further, the insurance executives then invested premiums in assets of questionable value, which have now plummeted.

Such incompetence ordinarily leads to bankruptcy, sale of assets to a competitor, and the exit of the worst-managed firms.

Now, our government is rewarding these morons by bailing them out. Better-managed firms will be burdened by having to compete with insurers with access to cheap government capital.

And consumers won't learn to be more judicious in their purchase of investment products.

This bailout is troubling all the way around. Just a disastrous development.

The article further declared, as if to justify this government intervention,

"The life-insurance industry is an important piece of the U.S. financial system."

That's really rich. Does anyone think our financial system would have unimportant pieces just sitting around, operating for no good purpose? I don't think any existing financial players aren't "an important piece of the U.S. financial system," do you?

Frankly, I'm disappointed in the lack of critical reporting in the Journal on this rather important story. Why do I have to rely on my own memory to remind me that life insurers go through this cycle every 10-20 years?

Shoddy reporting of a mistaken financial rescue.

For a more uplifting story, consider the Pulte-Centex merger in the home building sector. That's an example of what should happen to struggling firms. I'll write about that tomorrow.