Sunday, May 31, 2009

Standard & Poor’s Cocktail Chatter

A couple of interesting points surfaced during the opening reception of Standard & Poor’s insurance conference this evening. The conference always draws terrific speakers and a lot of decision makers in the insurance industry.
Some of the talk over cocktails centered on:
--accounting for other than temporary impairment, a new accounting guideline that has some top financial executives and investment managers trying to figure out how to address the treatment. What are some of the problems? Well, for one, they say that the new requirements don’t really spell out what needs to be done. Rather they leave a lot up to discretion. So, company executives are left to explain why they are not treating bonds as OTTI. The longer those investments are impaired, the harder the explanation. Auditors have to explain to companies what their guidelines on the issue will be and when there is a difference, auditors may well have the last say.
Investment managers have to decide when something is OTTI. One famous bond investment manager says that if something is down less than 10% from par, then they might not consider it an OTTI issue or if the bond is part of a class that is down anyway because of the illiquidity of the market. Other factors considered are the company, the industry and just how much of the decline in value is due to outside factors that are not tied to the company.
The one thing that is certain is that it is an educated guessing game.
--Another analyst believes that there could be opportunistic buying of insurers when the market finally bottoms and starts to rebound. Those in run-off or in a weakened position could be vulnerable; and,
--the state of mortgage insurers is still up in the air since economic factors and measures for the real estate market do not yet suggest an end to the real estate downturn.
Stay tuned for two more days of coverage.

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