U.S. Treasury Mulls Aid Program for Life, Bond, Mortgage Insurers

October 27, 2008

The Treasury Department is studying how it could give relief to insurance companies under a $700 billion financial services rescue package, two sources familiar with the deliberations said Friday.

The Troubled Asset Relief Program established by Congress earlier this month has been viewed primarily as a means to recapitalize banks and take bad assets off their books to help support creaking credit markets.

Last week, the Treasury tried to squash rumors the government was preparing to give bond and mortgage insurance companies a capital injection. But senior officials are considering how the Treasury might be able to aid state-regulated insurance companies, the sources said.

The Treasury so far has used capital powers to aid only federally regulated institutions. But the program, known as TARP, could be used to buy sour assets from other financial companies and help them scrub their balance sheets.

While there is no federal regulator for the insurance industry, which is regulated by states, some companies may qualify for aid because their parent holding companies operate under a federal charter. The Treasury Department has assigned a team to examine how it might deliver aid to the industry in a way that does not hit regulatory tripwires, the sources said.

STOCKS TURN POSITIVE

The KBW Insurance index turned positive after Reuters reported the Treasury thinking. Life and mortgage insurers led the rise as shares of Hartford Financial Group jumped 16 percent and Genworth Financial rose more than 11 percent.

But not all insurers’ shares rose. American International Group Inc, which has said it expects it may be able to benefit from access to TARP, ended down 19 percent.

AIG was bailed out by the federal government last month and said Friday that it has so far tapped the Federal Reserve for $90 billion. The insurer veered toward bankruptcy after mortgage-linked investments cost it $25 billion over three quarters.

MBIA Inc, the largest U.S. bond insurer, and its No. 2 rival, Ambac Financial Group Inc, met with regulators earlier this week to push for a way to tap into the government’s bailout plan.

New York Insurance Superintendent Eric Dinallo, the main regulator for MBIA, and Wisconsin Insurance Commissioner Sean Dilweg, Ambac’s primary regulator, convened in New York to discuss the matter with the firms.

Both companies have seen business grind to a near halt after large losses on mortgage debt guarantees and subsequent rating cuts.

TRADE GROUP SPEAKS UP

A leading financial trade group on Friday sent a letter to the Treasury asking that the government interpret its new TARP powers broadly and leave the door open to aid for insurers, automakers and subsidiaries of foreign banks or companies.

“The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market,” the Financial Services Roundtable wrote in a letter to TARP administrator Neel Kashkari. “The Roundtable would strongly urge that you permit such institutions to participate in the program.”

The Financial Services Roundtable represents major insurers, who are mulling whether the TARP program could be useful for them.

(Additional reporting from Lilla Zuill in New York; Editing by Dan Grebler)

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