It was a quite excellent day to be short insurers yesterday as news from Lincoln National (LNC) sunk the sector. We have been focused on Prudential (PRU) which we went short in the teeth of Kool Aid, suffering for a day or two (Mar 25: Short Prudential) but said it was really a coin toss over Hartford Financial (HIG) ... MetLife (MET) was not in very good shape either. (we did cover some Prudential short yesterday) The hilarity of last week was watching Prudential continue to rise despite downgrades in its debt... but when you have shorts on the run, stocks can go up, up, up. Principal Financial (PFG) also was downgraded last week, and late Friday took the steps of cutting pay (oooh, salary deflation) across the board to save costs. I always love those late Friday night announcements when public firms pull these stunts...

• Principal Financial Group will temporarily reduce salaries of employees, the management and the board by 2%-10% as part of the company's cost-saving effort, according to a company statement sent to MarketWatch on Monday. The company will also scale back personal time off, not fill open positions and suspend some corporate benefits. "These actions are designed to help offset decreased revenues caused by the markets' unprecedented impact on our asset based businesses," Principal Financial said.
• The pay cuts come two days after Moody's Investors Service cut the company's ratings saying Principal likely will face greater pressure on liquidity and earnings as the economic downturn affects its business.

This is going to be one very interesting sector since the regulators are at the state level, and I believe we have a potential federal level bailout coming (yes dear reader, even MORE of your tax money has a collision course with this sector) Right now the federal government is stalling on this end (Mar 12: WSJ - The Next Big Bailout Choice - Insurers) but if you can imagine the panic nationwide if people suppose the insurance companies don't have the funds necessary to make payments. So while its not within the bounds of federal government to step in, if capital markets don't boom and right quick... they will overstep their bounds (again) since its a "national emergency".