Thursday, December 25, 2008

Are Insurers Next?-4

"A group working for state insurance regulators has greenlighted several proposals submitted by the life-insurance industry in recent weeks aimed at lowering insurers' capital and reserve requirements. Actuaries and other technical experts at the National Association of Insurance Commissioners gave the go-ahead to several of nine proposals. The news will be welcomed by investors, who battered shares of life insurers in recent weeks on concerns insurers would have to raise capital on unfavorable terms to show regulators they can made good on retirement-income products that carry minimum-return guarantees. ... The American Council of Life Insurers' proposals touch on reserves and capital requirements for life insurance and variable annuities, as well as investment and accounting practices. Insurers have said that many of the proposals involve the elimination of reserves. The ACLI estimates that the changes would free up $22 billion to $28 billion industrywide", my emphasis, Lislie Scism (LS) at the WSJ, 8 December 2008.

"Thanks to an effort by New York regulators to give life insurers more flexibility in calculating their reserves, MetLife Inc. said earlier this month it expects to reduce by about $1.8 billion, or more than 30%, the amount it must post to show it can deliver on guarantees in mimimum-return variable annuities. ... Reserve levels and capital cushions of publicly-traded variable-annuity sellers have been under a microscope in recent months as analysts and stock investors have feared that regulatory requiremnts would prompt a round of capital raising on punishing terms. ... Under the system of state insurance regulation, insurance departments rely heavily on the NAIC's expertise in solvency matters to guide them in setting rules. But they aren't bound by the NAIC's moves", my emphasis, LS at the WSJ, 19 December 2008.

"With their guaranteed payouts and protection against market downturns, annuities have long enjoyed a reputation as a refuge in times of turmoil. But after AIG required government assistance (three times so far this year) to stay afloat and several life insurers saw their stock prices sink 70% or more over the course of two months, annuity owners might understandably be nervous. After all, you invest in an annuity because you want your money to be absolutely safe. So how secure is it? ... Although life insurers are certainly struggling, to date not one major company has bitten the dust as a result of the crisis, which is more than you can say about banks and investment firms", Fortune, 22 December 2008.

How does LS know what made insurers' shares fall? Isn't their investment porfolios' fall a more likely reason? That insurers get "regulatory forbearance" indicates they are in bad shape. LS writes of "unfavorable terms". To whom?

More flexibility? Or book cooking? Punishing terms? Why does LS favor insurers over prospective new investors? Does anyone at the WSJ edit LS's articles to keep her opinions off the news pages? Apparently not. Last year MetLife paid Deloitte & Touche (D&T) $47 million. D&T's 2008 opinion should be interesting. MetLife's Audit Committee (AC), whatever that is has members: Sylvia Burwell, a Rhodes Scholar who once worked for Robert Rubin; Burton Dole, retired chairman of Dole/Neal an energy mangement firm, who has a Stanford MBA and was Chairman of the Kansas City Fed; Cheryl Grise, an attorney; James Houghton, Harvard MBA; John Keane, Director of Keane Advisors, a private equity investment firm, has a Fordham bachelor's degree in accounting; Hugh Price, a Yale Law Degreed attorney; Kenton Sicchitano, retired PriceWaterhouseCoopers partner has a Harvard MBA and William Steere, retired as Chairman of Pfizer. What does the AC do? If MetLife has a reserve problem, why didn't they find it? Will they excoriate D&T for doing a bad audit? Will Dudley Do-right save Nell Fenwick? Imagine, Metlife's AC has a retired Big 87654 partner. Page 28 of MetLife's 18 March 2008 Proxy Statement says, "The [AC], on behalf of the Board, is responsible for overseeing management's conduct of MetLife's financial reporting and internal control processes". Really? Will Metlife report the $1.8 billion as a change in accounting principle or estimate, see FASB 154. What will MetLife claim is the rationale for this change? What happened in the last nine months to permit it?

So far, but the Fed and Treasury have no compunctions about taking insurers' assets to protect investment firms. Witness AIG.

1 comment:

Anonymous said...

"Insurers have said that many of the proposals involve the elimination of reserves. The ACLI estimates that the changes would free up $22 billion to $28 billion industrywide", my emphasis, Lislie Scism (LS) at the WSJ,..."

Makes me think of the excessive gearing that the investment banks did leading up to the credit crisis... thin the cushion...

The perception that the insurer is capable of making good wears away too...