Tuesday, April 7, 2009

The Insurance Industry and Collateral Damage

When the Government first began this journey towards a Brave New World, i.e direct intervention into every corner of the financial system and increasingly, the broader economy, the only thing we were sure of was the inevitability of unintended consequences. Of particular significance, we believe, is the rapid way in which the Insurance Industry has been affected by the actions of the Fed and Treasury, both of which were presumably acting with the best of intentions.

The first visible ramifications appeared soon after the Government's "loan" to American International Group, when complaints began to arise from AIG's competitors, alleging that the Company was offerring clients absurdly low premiums, across several lines of insurance, in order to retain business. Obviously, under normal conditions, under-cutting a competitor is as American as Living Beyond Your Means, however, the fact that Uncle Sam has annointed a Company with the title "Too Big To Fail", should not in itself provide a competitive advantage.

More recently, shares of Lincoln National Corporation have plunged following the Company's rescission of an application to participate in the Fed's commercial paper facility. Now, we understand that the Fed, likely the buyer of only resort in the commercial paper market, can not just pack up and leave that area of the financial system. However, by no means should inaccess to A Government Program ever put a perfectly healthy Company at risk in this way. We must assume that the Fed/Treasury have not fully investigated the massive policyholder liabilities that would be borne by State Guaranty Associations in the event of an Insurer collapse. Unfortunately, given that these same Institutions allowed Lehman Brothers to collapse, we can not be so sure that the Government has calculated anything more than half of a step ahead.
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