WASHINGTON--The American Insurance Association in a letter sent yesterday to Congress said lawmakers must ensure money being given to companies under federal aid programs doesn't allow them to compete unfairly with firms not taking U.S. funds.

The letter specifically cites the "Federal Reserve's intervention with American International Group" and the Treasury Department's creation of a Capital Purchase Program (CPP) under which it has designated $250 billion for qualified financial institutions in the form of equity stakes.

Besides AIG, mostly life insurance companies have applied for aid through the programs. They include Hartford Insurance Group, the Principal, Genworth Financial, the Phoenix Companies, Lincoln Financial, Protective Life and Aegon.

Other insurance companies with both life and property-casualty businesses have apparently applied as well, but have not publicly disclosed their applications.

So far, Treasury Secretary Henry Paulson has limited carriers under consideration for funding from the Troubled Asset Relief Program (TARP) to those which are currently subject to some federal regulation either through owning banking institutions or charters as a bank holding company.

As of now, only AIG has officially received aid. Most others have applied for aid by simultaneously saying they intend to acquire a thrift or a bank and/or at the same time applied for a bank holding company or thrift charter, if they did not have one already.

AIA also voiced concern "that government ownership of private companies does not produce regulatory policy at the state or federal level that gives those institutions a marketplace advantage over their competitors as government seeks to protect its investment."

The letter was sent to the chairmen and ranking minority members of the Senate Banking Committee and the House Financial Services Committee, the congressional panels that have primary oversight over the aid programs.

The government must act to ensure that providing this capital isn't used for unintended purposes, such as gaining market share from financial institutions that are accessing private capital at market rates, because this presents "a substantial risk of market distortion," the AIA said in the letter, signed by President Marc Racicot.

"Congress must exercise its oversight responsibility to ensure that the limited purposes of these initiatives do not result in outcomes that distort private markets and create conflicts with the government's role as market regulator," the letter said.

In addition, the letter warned, "there is a significant risk that the provision of subsidized government capital will perpetuate the view among companies that access to that capital is essential to keep pace with market competition."

It noted that the number of companies and industry sectors now seeking access to government capital under the Emergency Economic Stabilization Act (EESA) provides strong evidence that this concern is justified, "as institutions may feel compelled to participate in a dramatically discounted alternative to the capital markets."

If this happens, the letter added, "the fundamental purpose behind these government programs gives way to the misperception that government is needed as a permanent market participant in order to maintain the level of competition, rather than to provide emergency stabilization of the economy as a whole."

The programs cited in the letter include funds authorized through passage of the EESA in September, as well as related initiatives by the Federal Reserve and the Federal Deposit Insurance Corporation.

The letter is consistent with a statement issued by the AIA board Oct. 27 in which it said that it had surveyed its members, and that a majority had responded by saying they did not support the inclusion of property-casualty insurers in Treasury's Capital Purchase Program and that those members would elect not to participate in the CPP even if it were made available.

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