Thursday, November 20, 2008

Are Insurers Next?-2

"For years, variable annuities got a bad rap thanks to the high fees charged to buyers. Now stockholders of several life insurers that sell these financial products are worried they are the ones who got a raw deal. Shares of Hartford Financial Services Group Inc. are down 80% so far this year, and shares of Lincoln National Corp. and Prudential Financial are off 61% and 56%, respectively. Among the concerns: Will mounting costs in the market downdraft force some insurers that sell these products--many of which guarantee at least some kind of return to holders regardless of market conditions--to raise more capital to satisfy regulatory requirements? ... Fitch Ratings in a report last month estimated that capital needed to support the variable-annuity business had increased by as much as $15 billion across the U.S. life-insurance industry year-to-date, thanks largely to the dramatic decline in the markets", Leslie Scism at the WSJ, 5 November 2008.

"At the prompting of a major life-insurance trade group, state insurance regulators are considering moves to loosen capital requirements for the battered industry, a development that could buoy companies but also raise concerns about consumer protection. ... 'Let's be honest, were in new territory here,' said Susan Voss, commissioner of insurance in Iowa and secretary-treasurer of the National Association of Insurance Commissioners, in an interview Thursday. 'We want to be as nimble as possible and address these issues.' She added: 'I can tell you, we won't do anything that puts our consumers in a vulnerable position. It's a balancing act.' ... Scott Robinson, a senior credit officer at Moody's Investors Service, estimated that insurers in the U.S. may need 'in excess of $10 billion' in additonal capital if they aim to maintain current risk-based-capital-levels, a key measure of financial stability, though the total depends on market levels and other variables. ... Many items on the ACLI's list of sought-after changes relate to life-insurance accounting, while two focus on variable annuities", my emphasis, Leslie Scism at the WSJ, 14 November 2008.

"U.S. life insurers, weakened by losses on their immense investment portfolios, are maneuvering to get a slice of government bailout funds by buying up tiny banks. On Monday, two insurers, Genworth Financial Inc. and Lincoln National Corp., agreed to but small savings-and-loan institutions in Maple Grove, Minn., and Goodland, Ind. And on Friday, Hartford Financial Services Group Inc. said it had struck a deal to purchase Federal Trust Corp., in Sanford, Fla. ... It isn't yet clear whether insurers have received approval of government financing. But regulators have an interest in shoring up the insurance industry, which is one of the biggest providers of capital to U.S. businesses through its purchases of bonds and other assets. The insurance industry's interest in getting TARP money complicates an already heated competition for limited bailout funds. ... As turmoil from the stock and bond markets has seeped into the insurance industry, insurers have been hoarding cash to calm shareholders. ... They also took tens of billions of dollars of unrealized losses as the prices of corporate bonds dropped while investors dumped them in order to buy safer U.S. Treasurys. At the same time, their variable-annuity bussinesses are suffering as the stock market drops", my emphasis, Leslie Scism, Michael Crittenden, Matthew Karnitsching & Mattias Rieker at the WSJ, 18 November 2008.

This industry is worth watching.

Loosen capital requirements. Are the insurers investment banks looking to the SEC to ratify 40 to 1 leverage ratios? "It's a balancing act". It's an act all right. How many insurers are already insolvent? When all else fails, cook the books, i.e., create new accounting principles! Robinson is correct, the industry could need $50 billion under the right set of assumptions.

Limited bailout funds? We can fix that. Safer Treasurys? As Henny Youngman used to respond when asked, "How's your wife? Compared to who?"

1 comment:

Anonymous said...

Insurers played the stock market always up game... packaged that for retail taking a healthy fee...

Now they are out of the money... and will be manipulating the state and fed govs, accounting standards, seeking bailout funds.

The line gets longer... institutions see others getting bailed and want some too. It all started with JPM, MS and GSC and now its an epidemic...

Only a very big contraction will put end to it... because you know that policy makerrs can't stop themselves.