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Thursday, July 16, 2009


CIT fallout: insurers

via clusterstock -- it has been argued here, thanks to david goldman, that letting financial institutions fail is not a viable course of action because the primary party to be damaged by such a course would be insurers. many demutualized insurers are woefully undercapitalized in the aftermath of the 2008 crash as it is; further undermining their balance sheet with an attack on bank and financial company junior debt would likely send some significant segment of the industry over the brink into bankruptcy, creating further waves of financial panic and potentially necessitating a whole new series of expensive federal government backstops for the american insurance industry.

case in point would appear to be CIT, as investigated by bloomberg. john carney:

It looks like a bunch of big insurance companies are going to take a hit if CIT goes down. And that seems pretty damn certain right now.

So who has been left holding the debt. Well Aflac had about $240 million in CIT senior debt at the end of March. That's the equivalent of 12 percent of the company's excess capital. Does it still hold that much? No one is saying. But CIT had suffered 7 straight quarterly losses (it's up to 8 now) by then, and that didn't convince Aflac to dump the bonds. So was 8 a charm?

Then we've got Genworth Financial, which has about $178 million of the notes, according to a KBW analyst who spoke to Bloomberg. That amounts to about 13 percent of Genworth’s $915 million of excess capital.

MetLife had about $148 million in CIT notes. But since MetLife is so huge, that's a much smaller percentage of its capital. Only about 1.6 percent of estimated excess capita.

Lincoln National Corp. of Philadelphia had about $99 million in CIT bonds, according to KBW (again via Bloomberg).

It's possible that these company's have taken out credit default swaps on this debt. But that's become an expensive proposition lately.

i'll go ahead and say that there's zero chance the insurers bought massively expensive hedges for CIT in recent months; such was the pricing, if such hedges were even available, that they would have been of little aid. there remains the open possibility of an insurer-led crash, though the opening of TARP to insurers will hopefully reduce that possibility.

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