Thursday, April 30, 2009

Action Packed

Here are just a few items that many insurance issues in the news this week.

On April 30, as this item is being written, the National Association of Insurance Commissioners is conducting a hearing on credit scoring that includes scheduled testimony from Neil Alldredge of the National Association of Mutual Insurance Companies, Indianapolis, and Birny Birnbaum, an NAIC funded consumer representative with the Center for Economic Justice, Austin, Texas.

Birnbaum has argued for years that the NAIC needs to pay more attention to credit scoring and how it is used by insurers. He says that that importance has increased in a time of financial crisis when through no fault of their own, consumers may have credit scores lowered as the value of property declines.

Property casualty insurers counter that credit scoring is one important tool that they have to make sure that there is sufficient underwriting that keeps companies both solvent and insurance affordable.

On April 29, Kathleen Sebelius’ baptism by fire as Secretary of Health and Human Services began with a calm, honest assessment of what Americans could face with the H1N1 virus, nee swine flu. The possibility of a pandemic is frightening but Sebelius’ demeanor during an H1N1 press conference did instill confidence that there is someone at the helm that is capable of coordinating an intelligent response to the flu outbreak.

Also on April 29, members of the Senate were given a primer on the pros and cons of life settlements. The debate over life settlements has more energy than a waterspout over the ocean. It just spins and spins and spins. Some of the takeaways during the informational life settlement hearing of the Senate Special Committee on Aging sponsored by U.S. Sens. Herb Kohl, D-Wisc., and Mel Martinez, R-Fla., include:
--Fred Joseph, Colorado securities commissioner and president of the North American Securities Administrators Association reminding the committee that life settlement can enhance policyholder value but also have significant risks and thus, securities administrators are “the local cops on the securities beat.”
--James Avery, president-individual life insurance at Prudential Financial, representing the American Council of Life Insurers, explaining the fundamental principle of insurable interest and the genesis of stranger-originated life insurance. Simply put, according to Avery, “STOLI schemes are wagering or gambling.” And he says that seniors may face unexpected tax consequences from income due to the forgiveness of premium financing loan indebtedness.
--Michael Freedman, senior vice president of government affairs for Coventry First, noted how life settlements have given policyholders an additional option to lapsing or surrendering a policy. The added option, he told senators is particularly important because at least according to one assessment, 88% of life insurance contracts are surrendered. Life settlements offer fair market value to contract holders, according to Freedman. Freedman also notes that Coventry discloses to consumers alternatives to life settlements such as borrowing against cash value and accelerated death benefits but also notes that many insurers prohibit agents from talking about life settlements.
--Mary Beth Senkewicz, deputy insurance commissioner with the Florida office of insurance regulation, noted the importance of protecting life insurance and its tax exempt status. Senkewicz expresses concern that life settlements and STOLIs may endanger this tax exempt status. Interestingly, she points out that in 2008 the mean face value of viaticated policies in Florida increased from $89,000 in 1997 to $2.5 million in 2008. Senkewicz calls for STOLI to be banned at the federal level.
--Michael McRaith, Illinois Director, offered insight into the development of model legislation by the National Association of Insurance Commissioners, as well as efforts by individual state insurance departments.
--In written testimony, the National Conference of Insurance Legislators, Troy, N.Y., called for a balance to “safeguard seniors and properly oversee the industry, and that “transparency, disclosure, and accountability are key components in regulating the market.” The written testimony includes comments from NCOIL president James Seward and a New York state senator, about how an NCOIL model law defined STOLI as illegal and includes a 2-year contestability period.

Monday, April 27, 2009

Fear the Swine Flu, Not The Ability To Pay Claims

With the number of swine flu victims worldwide growing, and the number of those who have the flu growing in the United States, the nation’s leading life insurance trade group says that life insurers stand ready to meet their obligations should the outbreak mushroom into a pandemic.

Whit Cornman, a spokesman for the American Council of Life Insurers, Washington, was careful to say that although the situation is serious and bears watching, it is not at this point a reason for undue fear. If the flu does start to spread more rapidly and fatalities increase dramatically, Cornman notes that the life insurance industry has had experience in preparing for such a calamity with the avian bird flu scare four years ago. He notes that the industry paid claims through previous calamities such as the 1918 pandemic, other flu outbreaks in 1957 and 1968 and other major events such as World War II.

At 1 p.m. today, the Center for Disease Control, Atlanta, placed the number of cases in the U.S. at 40 cases as follows: California, 7 cases; Kansas, 2 cases; New York City, 28 cases; Ohio, 1 case; and Texas, 2 cases. In New York, the cases are centered in one school in Fresh Meadows, Queens—St. Francis Prep. Press reports suggest there are 17 potential additional cases at the school as well as 2 other cases nationally. More information on the swine flu can be accessed at

On April 26, the Department of Health and Human Services issued a nationwide public health emergency. And, the World Health Organization has raised its pandemic alert level after 73 cases have been confirmed worldwide on April 27. There are hundreds more suspected cases. In Mexico, 149 people have died and nearly 2,000 people are hospitalized.

Sunday, April 26, 2009

Ratings Roundup

The following are ratings that were issued for during the week of April 19 by Moody’s Investors Service and Standard & Poor’s Corp., both in New York.

AFLAC Inc.’s ‘A-‘ counterparty credit rating as well as the ‘AA-‘ counterparty credit and financial strength ratings of its insurance operations have been affirmed by S&P. They have also been removed from CreditWatch with negative implications, although the outlook on all companies remains ‘negative,’ S&P added.
The action was made after incorporating current ratings on hybrid securities into an analysis of AFLAC’s capitalization and applying stress tests to other asset classes to determine that it can maintain a level of statutory capital that supports existing ratings. The rating also reflects the AFLAC’s ability to generate over $2 billion annually. However, S&P also noted concern over the weakening credit quality of AFLAC’s hybrid security portfolio as well as sluggish sales in 2009.

Montpelier Re’s ‘Baa 1’ insurance financial strength rating and the ‘Baa3’ senior debt rating of its parent Montpelier Re Holdings Ltd., have been affirmed by Moody’s. The rating agency also changed the outlook to ‘positive’ to ‘stable’ reflecting enhanced risk management practices over the past several years.
“Montpelier's ratings reflect the company's strategic focus in catastrophe reinsurance, its meaningful capital base, moderate financial leverage, efficient operations, and proprietary enterprise risk management systems,” according to Moody’s. However, the rating agency also cited risks including a “these core strengths are tempered by the inherent volatility of the property catastrophe book and greater model risk in certain specialty classes of business” as well as the potential for execution risk given the company's meaningful expansion into the U.S. specialty market, and the potential for volatility arising from this business which is also subject to model error.”

Unitedhealth Group continues to receive a ‘buy’ recommendation from S&P. The company’ $0.81 EPS in first quarter beat S&P’s estimate by $0.14 and operating revenue rose by 9.1% compared with a 4.5% forecast due to more public and senior members than S&P said that it had expected.
XL Capital Ltd. has been assigned a ‘buy’ rating up from ‘hold’ by S&P. The rating agency said that the company’s shares appear to be fairly valued at 0.54x year-end 2008 tangible book value.

Friday, April 24, 2009

Calendar Items

Starting next week insurers will start reporting first quarter 2009 results. The following is a list of many insurers who will reporting through early May listed by date.
April 27
W.R. Berkley Corp.—news release followed by an April 28 webcast of the conference call.
April 29
Aetna—news release and conference call.
Aflac—news release followed by webcast of a conference call on April 30.
Unum Group—news release followed by a conference call on April 30.
April 30
CIGNA—news release and conference call.
Hartford Financial Services Group—news release followed by a May 1 conference call.
Met Life—news release followed by May 1 conference call and Webcast.
May 2
Berkshire Hathaway—annual meeting in Omaha, Neb.
May 4
Principal Financial Group—news release followed by a May 5 conference call.
May 5
Lincoln Financial Group—news release followed by a May 6 conference call and Webcast.
Phoenix Cos.—news release followed by a conference call.
Prudential Financial—news release followed by a May 6 conference call.
May 7
Allstate Corporation—news release followed by conference call on May 8.
Genworth Financial—news release followed by a May 8 conference call.
Manulife Financial—Webcast of its annual meeting and a separate webcast of its first quarter financial results.

In addition, Chubb Corp. reported first quarter 2009 net income of $341 million compared with $664 million in first quarter 2008. Operating income defined as net income less after-tax realized investment gains and losses, declined to $514 million from $620 million in respective 2009 and 2008 first quarters.
Among the reasons cited was a 7% decline in net written premiums and a first quarter combined loss and expense ratio of 88.1% in first quarter 2009 versus 83.9% in first quarter 2008. Property and casualty investment income after taxes also declined 6%.

Wednesday, April 22, 2009

Consumers Do Have Protections

Following up on yesterday’s post which chronicled the exchange between state insurance regulators and Allstate CEO Tom Wilson, here is something that consumers should consider before they lose heart with the current system of oversight.

The following is an article which I wrote on April 16 for, a joint IAC/Dow Jones venture. It suggests that the current system offers many protections for consumers.

When once mighty American International Group stumbled last September, the financial system wasn’t the only thing that was shaken. Daily blow-by-blow news accounts of the giant financial services company’s troubles also cast doubt over the soundness of insurers.
But choosing an insurance company to protect you doesn’t need to be a source of worry if consumers make a couple of mental notes to self and complete a few simple homework assignments.
The first and most important thing to keep in mind is that there is a safety net if financial disaster strikes a company, according to Jim Mumford, first deputy commissioner with the Iowa insurance department. “State guaranty funds offer the most comfort. Having that safety net is the most important thing. That is the ultimate security.”
Individual states have their own guaranty funds and guaranty fund limits. Links to these states’ Web sites can be found at, the Web site for the National Organization of Life & Health Guaranty Associations, Herndon, Va. The guaranty funds provide a backstop, offering protection and underscoring the solvency oversight that is part of insurance regulation, says Peter Gallanis, NOLGHA’s president.
Mumford notes that AIG’s insurance operations were safe and solvent and that it was a financial unit that destabilized the company.
And, he adds, the National Association of Insurance Commissioners, Kansas City, Mo., has just voted to increase guaranty fund limits. That recommendation will now go before state legislatures. While the increases might take a year or two to put into law depending on the state, some states including Iowa, have already implemented the changes, Mumford explains. The new recommended limits are $250,000 for individual annuities, up from $100,000; and $300,000 for long term care contracts, up from $150,000. Protection for life insurance contracts remains at $300,000 for death benefits and $100,000 for the cash value in the contract.
Now get ready for the homework assignment. The easiest way to find out if the company that you’re considering is financially strong is to check with rating agencies including Fitch Ratings, Moody’s Investors Service and Standard & Poor’s Corp. All three offer agencies offer free access to their ratings.
Another item on the financial strength checklist, according to Birny Birnbaum, a consumer advocate with the Center for Economic Justice, Austin, Texas., is to check and see which companies are seeking federal assistance through new government programs such as the TARP, more formally known as the Troubled Asset Relief Program.
And, if a consumer is using an agent, it is also worth checking to see how that producer is being compensated, says Birnbaum. For instance, some producers are compensated on a volume-based formula, he continues. The more policies sold, the greater the commission, he says. So, it is important to independently check to make sure that a company that is being recommended is strong.
In addition to ratings, the NAIC Web site has a consumer information source available at that provides financial information on companies.

Tuesday, April 21, 2009

Your Serve

AIG is the latest ping pong ball in the public relations match for advocates to make the case for federal or state regulation. The most recent match started when Tom Wilson, Allstate Corp.’s CEO made the case in The New York Times op-ed piece. Wilson wrote that the credit default swaps written by AIG are insurance and that it is surprising to argue that insurance did not contribute to the recent market failures. Wilson says that a new regulatory structure is needed and that the way to do it is “to eliminate the hodgepodge of state regulatory systems by establishing a federal regulator for national insurance companies.” Wilson also calls for a federal agency that would be empowered to deal with any large failing institutions.
Illinois Insurance Director Michael McRaith responded by noting “the myth-laden pleas of an otherwise prudent Tom Wilson…” McRaith returns the volley by reminding Wilson and those reading his response that state regulators enforce “rigorous” solvency standards by using “stringent stress-tests and capital requirements.” He also notes guaranty fund protections. McRaith also notes state insurance regulators welcome a collaborative effort to fill any gaps in regulating systemic risk. This viewpoint was voiced by NAIC President Terri Vaughan during a Congressional hearing in March.
What is needed is less rhetoric and more focus on the consumer. Is there any proof that a federal regulator will do a better job monitoring companies and thus, protecting consumers? Large banks weren’t reined in when they loaded up on toxic mortgages. At least insurers had a model investment law in place to create guardrails for what companies could invest in. Congress had to jump in and increase the amount of coverage on bank products.
State regulators can continue to strengthen their argument that they better serve consumers by listening carefully to consumer advocates. One of many opportunities will occur on April 30 when the National Association of Insurance Commissioners, Kansas City, Mo., holds a public hearing on credit-based insurance scores. Their most reasoned and their strongest argument for state regulation is their proximity to the people who need them most: the consumers.

Sunday, April 19, 2009

Ratings Roundup

The following are some of the ratings issued during the week of April 12 by Moody’s Investors Service and Standard & Poor’s Corp., both in New York.

Ambac Assurance Corp. and Ambac Assurance UK s’ financial strength rating has been downgraded to ‘Ba3’ from ‘Baa1’ by Moody’s. The senior debt rating of Ambac Financial Group was also downgraded to ‘Caa1’ from ‘Ba1.’ The downgrades reflect “weakened risk adjusted capitalization.”

AXA Group’s Japanese Life Insurance Companies had the ‘AA’ financial strength and counterparty credit ratings of AXA Life and the ‘A+’ financial strength and counterparty credit ratings of AXA Financial Life affirmed by S&P. The outlook of the former remains negative while the outlook of AXA Financial Life remains positive. The outlook follows AXA’s announcement that it plans to merge the two units into a company to be called AXA Life. The affirmation reflects S&P’s belief that the company will maintain its core status with the parent.

ING Groep N.V.’s U.S. life insurance subsidiaries have been put on CreditWatch with negative implications by S&P. The action follows the group’s recent announcement that it would undertake a strategic review of its businesses and rationalizing its U.S. operations.

Lincoln National Corp.’s senior debt rating was lowered to ‘Baa2’ from ‘Baa1’ while Lincoln Life Insurance Co.’s insurance financial strength rating has been lowered to ‘A2’ from ‘A1’ by Moody’s. The rating remains on review for a possible further downgrade. The action reflects the agency’s expectations of continued depressed earnings and further investment losses which will constrain already weakened liquidity and financial flexibility and capitalization. Moody’s noted LNC’s VA with guarantees business is exposed to equity markets. The review will also look at whether LNC will receive funding under the U.S. Treasury’s Capital Purchase Program. Failure to receive the funding will make it likely that there will be an additional rating downgrade, Moody’s says.

Wellpoint, Inc. ‘s ratings were affirmed by Moody’s following its announcement that it will sell its NextRx subsidiaries to Express Scripts for $4.7 billion. The outlook on Wellpoint and its subsidiaries remains negative. The sale, according to Moody’s, will allow Wellpoint to improve its financial profile by reducing debt, improving liquidity and strengthening risk-based capital.
Zurich Insurance Company had its financial strength rating, and senior and subordinated debt ratings affirmed at ‘A1,’ ‘A2,’ and ‘A3’ respectively by Moody’s. The ratings of Farmers Insurance Group had its ‘A2’ financial strength rating and ‘Baa2’ surplus notes affirmed. The announcement follows Zurich’s announcement that it will acquire the U.S. Personal Auto Group business of AIG.

Friday, April 17, 2009

Sending Out An SOS

During a recent discussion about standards being developed by the International Association of Insurance Supervisors, Basel, Switzerland, Rob Esson of the National Association of Insurance Commissioners, Kansas City, Mo., sent out an SOS. It wasn’t the kind of message that you put in a bottle and it eventually washes up onshore.
There are real consequences and a tight deadline, Esson explained to regulators and a lot of industry folks. The IAIS has set May 8 as a deadline for comments to its technical committee on capital and solvency standards. The technical committee is scheduled to meet in Taipei in June.
These standards could eventually be used by the International Monetary Fund and the World Bank, both in Washington, when these organizations evaluate countries. If approved, the standards will bind U.S. regulators and the companies that they regulate. “This changes the emphasis [of the discussion.] It takes it up a notch,” Esson told regulators and industry representatives.
Esson says that there are 3 possible responses: offer comment on the proposed standards and how they will be used to assess the U.S. regulatory system, actively support the proposal or oppose it. There is still time to weigh in and influence the discussion, said Esson. But he also noted that “it is difficult to make an argument that these standards should not be used in assessing the U.S. insurance system.
Industry participants offered their input.
Steve Broadie of the Property Casualty Insurers Association of America, Des Plaines, Ill., said that PCI generally supports moving together on standards. However, he added, there is concern about mandatory adherence to such standards.
That sentiment was also expressed by Bill Boyd of the National Association of Mutual Insurance Companies, Indianapolis, and the American Council of Life Insurers, Washington. A careful, comprehensive approach by the NAIC was urged.
Doug Barnert, executive director of the Group of North American Insurance Enterprises, New York, said that GNAIE will develop comments on the issue. While the proposed standards would probably not be an issue for GNAIE members, for smaller companies, it could impose additional work and cost to determine solvency assessments that it could make without the additional standards, he added.
He also noted that 19 of the 20 G20 members have an “ultimate regulator” but the U.S. has 50 regulators. So, how does one commissioner weigh in with G20 members? He asked. And, how can a viewpoint be created that will represent all insurance commissioners, Barnert asked.

Thursday, April 16, 2009

Déjà vu All Over Again

With the Yankees home opener a little more than an hour from now, it seems that a quote from Yogi Berra may sum up the discussion of annuities held by the Interstate Compact National Standards working group yesterday.
The group, part of the National Association of Insurance Commissioners, Kansas City, Mo., is working on standards for guaranteed living benefits and for guaranteed minimum death benefits for products filed with the Interstate Insurance Products Regulation Commission.
The crux of the issue focused on a request from companies to put a restriction on GLB riders when contracts are sold to institutional investors. The concern expressed by some regulators was that such restrictions would limit a policyholder’s contractual rights and ability to realize the benefit of the rider, even if that benefit was realized through an increased sale value of the contract.
Here’s where the déjà vu part comes in. The argument, at least from the peanut gallery, sounds awfully similar to arguments that were made during the revamp of the NAIC’s Viatical Settlement model act.
Cande Olsen spoke for many of the annuity companies that participated in the discussion, cautioning that if the issue is not addressed there could be a number of unintended consequences such as companies choosing not to file with the IIPRC but rather with states that afforded companies such protection. Other possibilities she raised included a higher cost associated with annuities with GLBs, a restructuring of the product or a reduced availability of the popular feature.
Companies urged that they have options available to them such as the ability to terminate a GLB rider that is not part of the base contract, reject assignments to institutional investors or reset benefits.
Regulators including Joe Musgrove of Arkansas and Tomas Serbinowski of Utah, questioned how this could be done without infringing on a contract holder’s right to make full use of the contract.
John MacBain, speaking for the annuity providers, argued that institutional investors can react more efficiently in the marketplace to which Serbinowski replied that insurers should price more efficiently. But industry countered that to price this new possibility into the market could potentially price these riders out of the market.
The discussion is going to continue with insurers promising to try to bring data back to regulators to make their case.

Saturday, April 11, 2009

Ratings Roundup

Ratings agencies during the week of April 5 issued several ratings announcements on insurers as well as reports detailing trends for mortgage insurers, the effect of TARP on life insurers and the impact of the corporate default rate on insurers.
Among the companies reviewed are:
--ING Life Insurance Co., Ltd(ING Life Japan), which had its Standard & Poor’s Corp. ‘A+’ financial strength and counterparty credit ratings put on CreditWatch with negative implications it parents announcement that its life insurance activities are under review and reflecting “growing uncertainties” about the unit’s status within ING Groep.
--Northwestern Mutual Life Ins. Co. and Northwestern Long Term Care Ins. Co., which had it insurance financial strength rating affirmed at ‘Aaa’ by Moody’s Investors Service with a ‘stable’ outlook. Moody’s affirmed the ratings citing “the company’s exceptional franchise in individual life insurance, which is demonstrated by its excellent persistency, mortality and expense management, as well as its solid capitalization.” However, Moody’s did express some concern over NWM’s “relatively large concentration in direct commercial mortgage loans” in a time when there is an economic downturn.
--Torchmark Corp. had its ‘Baa1’ senior debt rating affirmed by Moody’s but its rating outlook assigned ‘negative’ down from ‘stable’. Its two life units, Liberty National Life Ins. Co. and United Investors Life Ins. Co. had their respective ‘A1’ and ‘A3’ insurance financial strength ratings affirmed but with a negative outlook. The rating agency cited “strong earnings capacity” and its “very stable liability profile, and good, resilient capital adequacy.” However, Moody’s also cited the expectation of higher credit related investment losses, as well as tighter liquidity in the current stressful economic environment.

Among the issues the ratings agencies tackled this week were:
--Corporate Credit Quality and Credit Default Rates by Moody’s. The global credit quality for corporate issuers had a downgrade rate of 13.8% in the first quarter of 2009 compared with 10.2% in 2006 and a 12.5% rate from 1983-2009, Moody’s stated. The upgrade rate for first quarter 2009 was 0.5% compared with 7.9% from 1983-2009, it adds. Global speculative grade defaults finished first quarter 2009 at 7% up from 4.1% at the end of 2008. A year ago the global default rate stood at 1.5%. Moody’s is predicting that the global default rate will rise to 14.6% in fourth quarter 2009 and will remain at an elevated 11.7% a year from now.
--Global Financial Turbulence’s Impact on Property Casualty Insurers will make it hard for the property-casualty industry to achieve rapid growth, according to S&P. The reason, according to S&P, is that policyholders may reduce coverage and increase retention to reduce premiums.
--U.S. Mortgage Insurers Were Downgraded by S&P in a move in which the “uncertainty” in today’s economy was cited as a major consideration. In fact, during a teleconference, S&P said that the uncertainty is great enough to create a wide range of potential losses for the industry ranging from $34-54 billion. In fact, the uncertainty surrounding mortgage performance while leading to an expectation of weaker operating results for 2009-2011 for mortgage insurers, could turn around and result in strong 2011 operating results. During the teleconference, analysts were asked if TARP was incorporated into the ratings decisions. S&P said that because there was no clear indication that TARP would be applied to mortgage insurers, it was not. And, if it was applied, then it is not clear if there would be capital injections, guarantees or reinsurance used to provide assistance to companies. However, if the program does become available to mortgage insurers and there is clarity on how it will be used, it would be a factor in ratings, S&P said.
--TARP Capital Purchase Program Could Give Life Insurers A Boost according to S&P. Participation in the program could bolster liquidity and capital at a time when they are really needed by companies, the rating agency says in an article. While upgrades are not expected if the relief comes through, some companies could receive a ‘stable’ rather than a ‘negative’ outlook, according to S&P.

Friday, April 10, 2009

We’re Getting Warmer. Really!

For advocates of principles-based reserving, the American Academy of Actuaries has a message for you: keep the faith, the project is making progress. The message was delivered by the Academy’s Donna Claire, who is spearheading the massive effort, on April 9 during the Academy’s quarterly update.
Larry Bruning, who is chair of the NAIC’s Life & Health Actuarial Task Force, regulators who are actuarial specialists, explained the detail work that needs to be done to bring the project to the finish line. And, he expressed surprise at a question posed by a participant—“Is PBR really going to happen?” Bruning responded by saying that it is already happening in pieces as evidenced by C3 Phase II and AG 43. And, he added, it is still the goal to pass a new Standard Valuation Law in 2009. That adoption by the NAIC would start a 2-3 year adoption process in state legislatures, Bruning adds.
One of the big issues that everyone is trying to figure out is how to advance the project and keep Treasury and IRS happy. In meetings last year, one of things that became clear was that there was a question about whether the IRS approved of how lapse rates would be treated under the new reserving approach and concern over a gross premium approach to reserving, according to Tom Campbell, a Hartford Life actuary who also represents the Academy.
LHATF’s Bruning told participants that as a result, the ACLI has brought a net premium approach before the regulatory group as a way to clear a potential objection to the project.
Among the items that are being examined to bring the project to completion is the use of potential new valuation mortality tables that would be incorporated into a valuation manual that is being put together. The current proposed loading formula would be consistent with the 2001 CSO Table. A total of 40 companies have contributed data to this table compared with 20 used to produce the 2001 Table, according to Bruning. Consequently, a “valid question” is raised about whether there is a need to address adverse deviation if there are a larger number of companies who have provided data. While the issue is ultimately a regulatory decision, Bruning explained that the impact on the cost of repricing and reformulating policy forms does need to be given attention.
Other issues discussed on the Academy call included an update on LHATF actuarial decisions on capital and surplus relief questions first raised by the ACLI late last year in order to provide some relief to companies in troubled times. The task force hopes to report its recommendations to the NAIC “A” committee by the June summer meeting in Minneapolis.
The Academy’s Campbell also gave an update on variable annuity reserving issues, noting that now that AG 43, better known as VA-CARVM, is in force companies need to be working on implementing the systems needed to comply with the new requirements. And, he said in the coming week there will be there will be an update on the Life Practice Note on AG 43 posted on the Academy site. He also encouraged those who want to learn more to participate in a joint SOA/AAA seminar on May 19-20.
Phil Barlow, chair of the NAIC’s Life RBC working group, said that the C-3 Phase III project capital requirement is nearing completion. The capital project applies to life insurance products for both direct and reinsured contracts and covers UL, VL, VUL, WL and indexed life and indexed UL policies. All in-force policies, not just newly issued policies, would be covered. Even if the project is delayed, it is likely that RBC instructions can be put in place, he added. And, as a principles-based approach is put into place, conceivably C-3 Phase III could be adjusted to include annuities, he explained.

Wednesday, April 8, 2009

Too Big To Fail

One of the more interesting phrases coined of late is the term “too big to fail.” Use of the term gained traction following the troubles of large U.S. banks and American International Group. The concept that some companies are just so important to the U.S. and international financial services systems that they can’t be allowed to sink is one I get.
What is a little more difficult to grasp is just how this newly minted phrase will morph in discussions in Congress over how financial services should be regulated. One of the comments that I found particularly interesting and just a tad disturbing was made last month during a hearing on systemic risk held by the House Capital Markets, Insurance and Government Sponsored Enterprises financial services subcommittee. Now why should a comment made a month ago still be of interest? Well, because it was so counter to the entrepreneurial spirit of this country.
One of the suggestions made by a panel member was that the “too big to fail” issue could be diffused by requiring spin offs of pieces of a company when they reach a quarter trillion in size. Perhaps it was just a comment made in a concerned moment. Many of the comments being made in Washington may be just balm for financially wounded constituents.
But what if comments or more importantly, true beliefs in such views show up in the call for a systemic risk regulator or in an optional federal charter bill. Given the current mood, it could very well happen. That would put an interesting spin on OFC.
And, how do you define “big” and “too big”? I’m looking at the Empire State Building right now and it looks big to me. But for King Kong, maybe it’s not so big. How do you measure big? By admitted assets, premium, or by market cap? Should it be some combination of the three?
It also begs the question of what is small. How about smaller insurance companies? If you’re a policyholder with a troubled company, your carrier is too big to fail regardless of its size. And, even with the safety net of the guaranty funds, your policy is too big to be part of a seized company regardless of how modest a contract it may seem to others.


A few visitors have said that they are having trouble posting a comment. After some tinkering, I think I've found an answer. When you hit the type of visitor tab, several options appear. At the bottom of the list is an option to post anonymously. If you hit that option, you can post. If you want to identify yourself, just include your name and organization, after your copy. For instance:

Visitors to The Insurance Bellwether are bright, witty and ahead of the curve.
Jim Connolly
The Insurance Bellwether

Hope this helps. Please let me know if there are any other glitches or anything you would like to see changed. Thanks.

Monday, April 6, 2009

What Now For Fair Value?

Financial services groups are probably huddling right now to figure what to do about the April 2 vote on mark-to-market accounting taken by the Financial Accounting Standards Board, Norwalk, Conn. The action was taken on FASB staff position 157-e.
Immediately following the vote, a coalition of business organizations questioned the FASB’s objective of measuring fair value as an orderly transition in a current market. However, FASB was lauded by the coalition for its decision on impairment rules which “represent real progress in the accurate reflection of real economic losses.” In a nutshell, companies would not have to report impairments on their income statements if they intend and are not forced to sell assets before they regain their full value. If 100% of cash flows are expected to be recovered, then an impairment would have to be recognized.
The coalition includes the American Council of Life Insurers, the Commercial Mortgage Securities Association, the Council of Federal Home Loan Banks, the International Council of Shopping Centers, the Group of North American Insurance Enterprises, the Mortgage Bankers Association, the National Association of Home Builders, the Property Casualty Insurers Association of America, The Financial Services Roundtable, the Real Estate Roundtable, and the U.S. Chamber of Commerce. Whew! Did I get them all?
Doug Barnert, GNAIE’s executive director, explained the dilemma GNAIE and others see with the FV vote. The crux of the problem is whether a current market should be used as a standard for determining exit value, he explains. Right now, the current market is inactive and not a good way to measure FV, he explains. The board’s goal for an orderly transaction is not possible right now because the market is disorderly, he adds. Barnert says he has heard buzz that companies may refrain from early first quarter implementation because of the uncertainty surrounding how to do a fair value calculation.
Coalition members as well as any other insurer interested in fair value accounting don’t have a lot of time to figure out what to do. A briefing document of the decision was released today and the effective date for these new standards is scheduled to become effective for periods ending after June 15.
What will be interesting to watch is whether there is much will among members of Congress to listen to the arguments of these groups. A flagging economy; troubled automakers, banks, and giant insurer AIG; as well as fearsome unemployment figures may push the issue to the back burner. After all, Congress could argue. FASB is the accounting guru. Let it do what it does best and free Congress up to tackle other pressing tasks.
Stay tuned on this one.

Saturday, April 4, 2009

Ratings Roundup

Here is a list of some of the ratings announcements made by Moody’s Investors Service and Standard & Poor’s Corp., both in New York during the week of March 29.
Financial Strength/Debt
Aetna Life Ins. Co. and Aetna Inc.’s core operating companies had their ‘A+’ financial strength and counterparty credit ratings affirmed by S&P. The ‘A-‘ counterparty credit rating on Aetna, Inc., was also affirmed. The outlook on these companies remains ‘stable’ according to S&P. Among the reasons cited for the ratings were: diversity of businesses, strong earnings and strong cash flow.

Americo Financial Life & Annuity Ins. Co. will retain its S&P ‘A-‘ financial strength and counterparty credit ratings on CreditWatch where it is now placed with negative implications. The rating is on hold while the company develops capital plans, according to S&P.

Conseco Inc. and its insurance subsidiaries have been affirmed by S&P which is also assigning a ‘negative’ outlook on these companies. The action, according to S&P, results follows the company’s announcements that it has amended credit facility covenants to provide greater cushion and that “the auditor’s opinion regarding 2008 operating results is unqualified.” S&P did note improved 2008 operating earnings but raised the issue of sustainability.

Fortis Corporate Insurance N.V. has had its ‘A-‘ counterparty credit and financial strength ratings of the commercial lines insurer affirmed by S&P but also was assigned a ‘negative’ outlook. The affirmation reflects a “strong, albeit weakened, capitalization and good competitive position in its specialty markets.” However, S&P also noted “pressure on operating performance, and uncertainty about the company’s future ownership and strategy.”

Genworth Financial, Inc. has had its senior debt ratings downgraded to ‘Baa3’ from ‘Baa1’ by Moody’s. The company’s primary life insurance subsidiaries including Genworth Life Ins. Co., have received an insurance financial strength ratings of ‘A2’ compared with its previous ‘A1’ by Moody’s.
The rating agency said the downgrade and negative outlook were driven by the expected impact of investment losses on profitability and capital generation and the weakened financial flexibility of the holding company in the current distressed market.
But Moody’s also noted a risk-based capital level of ‘well above 400%’ and ‘a robust cash position’ after drawing down on its bank credit facility to fund $700 million of debt maturities in May and June.

The Hartford Financial Services Group has had the insurance financial strength ratings for its life insurance subsidiaries downgraded to ‘A3’ from ‘A1’ by Moody’s. The property and casualty operations were downgraded to ‘A2’ from ‘A1.’ And The Hartford’s long-term senior debt was downgraded to ‘Baa3’ from ‘Baa1’ and short term debt ratings to ‘P-3’ to ‘P-2.’ Reasons cited include ‘expected continued weakness in earnings and reduced capitalization resulting from investment losses and substantial exposure to variable annuities.”

Jackson National Life Ins. Co., a unit of Prudential plc, has had its ‘A1’ insurance financial strength rating affirmed by Moody’s. A key part of the affirmation is the support of parent. However, Moody’s also noted that the company is well-positioned in the asset accumulation business with a broad annuity product offering and multiple distribution channels.
Equity Research

XL Capital, has received a ‘buy’ recommendation on its shares from S&P, raising its 12-month target price to $7 from $5. The rating agency views the shares as ‘speculative’ and the risk profile as ‘high’ but undervalued compared with the insurer’s peers. The shares, according to S&P, trade at approximately .40x2008 tangible shareholders’ equity (excluding goodwill and deferred acquisition costs) compared with a peer average of approximately 1.7x.

Lincoln National Corp. now has an S&P recommendation of ‘hold’ from ‘buy.’ LNC is trading at a discount to its peers, says S&P, but factors including above average equity sensitivity, and sizable intangible assets including variable annuity deferred acquisition costs and goodwill. S&P notes that LNC can use internal resources to maneuver around potential shortfalls in liquidity and capital but also has ‘weaker’ financial flexibility than its peers and “less margin for error.”


Welcome to my blog. After a pause from my daily coverage of insurance and financial planning matters, I’m back. My goal is to report fairly and to comment with insight.
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Jim Connolly