Thursday, September 30, 2010

AIG Plans to Repay Government a Neutral, Rating Agencies Say

Rating agencies are saying that American International Group’s plan to repay the U.S. government in full is a neutral.

Earlier today, the troubled insurer, based in New York, announced that it has entered into an agreement-in-principle with the U.S. Department of the Treasury, the Federal Reserve Bank of New York, and the AIG Credit Facility Trust designed to repay its obligations.

The three part plan includes:

--Repaying and terminating the FRBNY credit facility with AIG. Today, according to the company, AIG owes the FRBNY approximately $20 billion in senior secured debt under the facility. AIG expects to use resources from its parent as well as proceeds from the disposition of its assets to pay off the debt. The dispositions would include the public offering of its Asian life insurance business including American International Assurance Company Ltd. (AIA), and the pending sale of its foreign life insurance company American Life Insurance Company (ALICO) to MetLife, Inc.

--Facilitating the orderly exit of the U.S. government’s interests in two special purpose vehicles that hold AIA and ALICO totaling approximately $26 billion. The exit will be executed by drawing down up to $22 billion of undrawn Series F funds available to the company under the Troubled Asset Relief Program (TARP) to purchase an equal amount of the FRBNY’s preferred interests in the SPVs. AIG will then immediately transfer these preferred interests to the U.S. Treasury as part of its consideration for the Series F preferred shares. AIG also will apply proceeds from future asset monetizations, including the announced sales of the AIG Star Life Insurance Co. and AIG Edison Life Insurance, to retire the remainder of the FRBNY’s SPV preferred interests. When these transactions are completed, AIG expects that it will haverepaid the FRBNY in full.

To retire the U.S. Treasury’s preferred interests in the SPVs, AIG will apply the proceeds of future asset monetizations, including its remaining equity stake in AIA and the equity securities of MetLife that AIG will own after the sale of ALICO to MetLife closes.

--Retiring AIG’s remaining TARP support and Series C preferred shares which amounts to approximately $49.1 billion. Under the plan, the U.S. Treasury is expected to receive approximately 1.655 billion shares of AIG common stock in exchange for the $49.1 billion of TARP Series E and Series F preferred shares and the Series C preferred shares currently held by the AIG Credit Facility Trust. In addition, AIG will issue up to 75 million warrants with a strike price of $45.00 per share to existing common shareholders. Upon the exchange, the U.S. Treasury will own 92.1% of the common stock of AIG. The exchange will not be executed until the FRBNY credit facility is repaid in full. After the exchange is completed, it is expected that over time the U.S. Treasury will sell its stake in AIG on the open market.
AIG expects to repay and terminate the FRBNY credit facility and complete the issuance of common stock to the U.S. Treasury before the end of the first quarter of 2011, subject to regulatory approvals and other closing conditions.

Standard & Poor’s Ratings Services, New York, issued a statement saying that its ratings on American International Group Inc. (AIG; A-/Negative/A-1) and AIG's insurance subsidiaries (most of which are rated A+/Negative/--) are not affected by the company's announced recapitalization plan. However, S&P added that although the ratings on AIG and its operating subsidiaries are unchanged, the announcement is a positive credit development.

The announcement, according to S&P, is a favorable development for AIG's long-term unsecured creditors which will probably result in an upgrade of its stand-alone credit assessment of AIG to 'BBB+' from 'BB' upon the successful execution of the American International Assurance IPO and the completion of the Alico divestiture.
Other positives cited by the rating agency include: AIG’s continued improvement in its overall liquidity position through its successful wind-down of AIG Financial Products and the reduction of other contingent liquidity needs. In addition, S&P says that it expects that the removal of the uncertainty surrounding the parent should boost AIG's insurance operations' competitive position, which we consider strong, and should lead to improved profitability over the longer term.

S&P added that although we believe AIG's recapitalization plan mitigates the execution risk associated with the government repayment, concerns surrounding overall operating performance remain. The rating agency says it will likely address the ratings on both AIG and its insurance operations by early 2011 following our review of third-quarter operating performance and discussions with AIG on its updated enterprise risk management programs.

Separately, S&P has issued a ‘Hold’ recommendation on AIG stock, noting that “Given the complicated nature of AIG's bailout, we view positively today's announced plan, which includes a mechanism to repay the Federal Reserve Bank of N.Y., but actually increases the U.S. Government's common equity stake in AIG to 92%, diluting existing shareholder interests.

“We also note that recently announced asset sales have included writedowns to goodwill, and therefore we still believe common stock investors should focus on tangible equity, which was a negative $38.92 at 6/30/10. Our $43 target price (raised $3) assumes the shares trade below stated book value, according to S&P analyst Catherine Seifert.

A.M. Best Co., Oldwick, N.J., announced that AIG’s issuer credit rating of ‘bbb’ is unchanged following the insurer’s announcement. The ratings of all AIG subsidiaries are also unchanged. Best explained that “while the specific details of the plan are now being made public, it has been the expectation since the initiation of the government’s involvement that such involvement would not be permanent. As such, the announcement of this final plan is not itself a trigger for rating action by A.M. Best.”

Best noted that while these actions will streamlined and strengthened balance sheet with reduced debt, the company’s ratings have been based on U.S. government support and going forward, AIG will have to stand on its own. It will need to re-establish itself with the capital markets; restore shareholder confidence, particularly with institutional investors, and demonstrate sufficient liquidity when it no longer has government support.

Moody’s Investors Service, New York, affirmed the company’s long-term ratings as well as the ‘Aa3’ insurance financial strength ratings of Chartis U.S. and the A1 IFS ratings of SunAmerica Financial Group (SFG). The rating outlook for these entities remains negative, reflecting the risk that the government would conclude its ownership and support of AIG before the company achieves a full recovery of its core operations and an exit from or de-risking of noncore businesses.

Additionally, the Prime-1 short-term ratings of AIG and of certain guaranteed subsidiaries have been placed on review for possible downgrade in light of the proposed elimination of government funding commitments that the company announced it would conclude in its plan.

"The proposed repayment plan signals AIG's progress in stabilizing its core insurance operations and exiting noncore businesses," said Bruce Ballentine, Moody's lead analyst for AIG. "It also points the way toward a sustainable capital structure." On the other hand, the plan hastens the end of explicit government support for AIG, which has been an important consideration in the company's ratings. While the announced plan would involve the government retaining significant ownership of AIG, at least in the near term, Moody's believes that the ownership stake and implicit support will decline over the next couple of years. Therefore, the ratings of AIG and its subsidiaries will increasingly depend on their
stand-alone credit profiles, raising the risk of downgrades if the credit metrics do not improve as expected. "The current ratings also reflect our expectation that AIG will maintain sufficient capital and liquidity to withstand severe stresses in the insurance and financial markets following the removal of government funding facilities," said Ballentine.

Saturday, September 25, 2010

Proposed IASB Discount Rate Proposal Could Hurt Immediate Annuities, Long-term Care products, Insurers Say

State insurance regulators are monitoring efforts to modernize reserving and accounting systems that are currently underway.

Efforts to modernize reserving with a principles-based reserving system that more accurately reflects the risk of a life insurers is an internally driven effort that the National Association of Insurance Commissioners, Kansas City, Mo.; the American Academy of Actuaries, Washington; and the American Council of Life Insurers, Washington; have been working on for over five years.

"Our modernization efforts promise to improve the accuracy with which regulators and companies match reserves to risk. It will be vital that we implement these core consumer protections with the clearest possible view of their impacts," said Thomas R. Sullivan, Chair of the NAIC Life Insurance and Annuities Committee and Connecticut Insurance Commissioner.

The NAIC is currently doing a test run to see how the PBR approach will work. The work is being done by the actuarial consulting firm of Towers Watson to examine PBR provisions (VM-20) of the Draft Valuation Manual. The study will calculate the impact of these provisions on industry reserves and compare them to current methodologies.

"Measuring impacts is an important part of completing adoption of these modernization tools," said Adam Hamm, Chair of the NAIC Principles-Based Reserving Working Group and North Dakota Insurance Commissioner. "We will work with our partners to ensure that the entire process remains thorough and rigorous. Our goal is to improve the consumer protections gained through strong solvency standards."

Work on the PBR impact study will begin immediately and is expected to be completed by March 31, 2011. The NAIC plans to present the final report during its 2011 Summer National Meeting in Philadelphia.

Regulators are also responding to an externally driven project driven by a reexamination of international accounting standards by the International Accounting Standards Board, London, and the Financial Accounting Standards Board, Norwalk, Conn.

On Sept. 17, the FASB issued its discussion paper on insurance contracts with all comments to be received by Dec. 15. The draft follows a June 2010 release of an IASB exposure draft of a proposed international financial reporting standard that would apply to all insurance contracts written by both insurance companies and noninsurance companies.

The FASB Discussion Paper asks stakeholders to provide input about the following:

-- Whether the IASB's proposal would be a sufficient improvement to U.S. GAAP to justify the cost of change;
--Whether the project goals of improvement, convergence;
--Whether simplification would be more effectively achieved by making targeted improvements to existing U.S. GAAP (rather than issuing comprehensive new guidance); and,
--Whether certain critical accounting issues for which the preliminary views of the FASB differ from the IASB's exposure draft.

With that as a backdrop, a joint conference call was held by the International Accounting Standards (EX) working Group and the Statutory Accounting Principles “E” working group, led by Rob Esson, the NAIC’s senior international advisor.

During the call, the working groups tried to hammer out points so that a conversation of the insurance contracts subgroup in Kansas City, this coming week will be streamlined. The subgroup is trying to formulate comments to responses on the IASB draft by the International Association of Insurance Supervisors, Basel, Switzerland.

The discussion included a review of a series of 19 questions ranging from relevant information to users of insurers’ financial statements to the appropriate discount rate used by the insurer for non-participating contracts and whether it should reflect contract liability and not the assets backing the liability.

On the discount rate issue, Esson said that there is not absolute uniformity among regulators on the issue. The NAIC’s staff draft, according to Esson, is based on its understanding of the majority view of the NAIC’s Life & Health Actuarial Task Force that adjustments to any asset portfolio is limited to specific risk and default risk is removed from that portfolio and addressed through an economic default adjusted rate.

Esson went on to describe how the NAIC understood concerns that such an approach could impact contracts, particularly long-term contracts.

Doug Barnert, executive director with the Group of North American Insurance Enterprises, New York, said that he could not specifically comment on what companies would or would not do in response to such a requirement. However, he did say that there is the potential to create a situation that would be “extremely unprofitable,” and when businesses are not profitable, generally they exit the market.

Alan Close of Northwestern Mutual, Milwaukee, representing the ACLI, said that insurers are “very much concerned that a rate that creates an artificial restraint would produce a loss on a number of long-term contracts.” He cited the immediate annuity as one example. He argued that guidance should develop a principle for a discount rate for the time value of money.

A discussion of how to define the risk-free rate (RFR) ensued and the NAIC’s Esson said that the U.S. short-term government bill rate is the rate that should be used.

In response to a question from Bill Carmello, a New York regulator about whether the present value of earnings from an investment should be shown over time, GNAIE’s Barnert said that investors want to know management’s estimate of what they expect to earn and what they will pay out on portfolios.

Esson enumerated a number of potential responses to the discount issue:

--a straight U.S. risk-free rate;
--a RFR with a liquidity adjustment as recommended by the IASB in which the method of calculation is very open but corresponds with the minority view on LHATF on VM-20;
--the majority view of LHATF on VM-20;
--a benchmark rate; and,
--an economic rate that is not a default adjusted rate but a pure portfolio rate.

Esson cautioned, however, that “the chances of that passing the IASB and FASB are zero.” Carmello reminded regulators that VM-20 is still in the testing stage. Esson noted, however, that for those that are participating in the insurance contracts roundtable, the deadline is Nov. 30, so that there is no time to waste because 35 percent of the world insurance premium will be representing themselves before the IASB.

The discussion turned to how there are different approaches in different parts of the world. For instance, in Europe, the approach is basically the Solvency II approach of a RFR with a liquidity adjustment that is small except in very stressed markets. And, in Australia, it is the RFR.

Henry Siegel, a life actuary with New York Life, New York, noted that there are potentially serious implications for products including immediate annuities and long-term care products.

Marty Carus, representing American International Group, New York, said that consumers would have to pay for “capital being held hostage for considerable periods of time.”

Thursday, September 23, 2010

PPACA's Changes Kick In Even As Technical Work Continues

Requirements under the Patient Protection and Affordable Care Act kicked in today even as the real work to make the law work continue to be developed.

During a meeting with President Barack Obama, commissioners from 34 states and jurisdictions discussed technical issues critical to making the law work. The meeting also included Secretary of Health and Human Services Kathleen Sebelius and Secretary of Labor Hilda Solis and top Administration advisors from the White House, including Stephanie Cutter, Assistant to the President for Special Projects and Nancy-Ann DeParle, Counselor to the President and Director of the Office of Health Reform.

In a press briefing after the gathering, leadership of the National Association of Insurance Commissioners, Kansas City, Mo., discussed key issues such as phasing in medical loss ratio requirements in an effort to prevent the possibility that insurers in the individual market may stop writing business.

Under the law, 80% of premium must be applied to claims. Present at the briefing was Jane Cline, NAIC president and West Virginia insurance Commissioner; Susan Voss, NAIC president-elect and Iowa insurance commissioner; Kevin McCarty, NAIC vice president and Florida insurance commissioner; and Sandy Praeger, past NAIC president and Kansas insurance commissioner.

Praeger said that one of the roles of states will be to provide accurate information to consumers to counter inaccurate information that is publicly available.
Concern over a potential market disruption caused by the new MLR requirements is raising concern in a number of states including Florida, Iowa and Maine. The Florida department will hold a hearing on Sept. 24 to gather concrete evidence about the disruptions, says McCarty. Iowa’s Voss and Maine’s Superintendent Mila Kofman have both sent letters to HHS requesting phase-in periods through 2014, according to the discussion.

West Virginia’s Cline said that flexibility is needed because there are some instances such as agent commissions which might not be flexible because they are multi-year contracts that are bound by contractual law.

Iowa sent a letter on Sept. 21 making the request for a phase in through 2014, according to Voss, because several carriers in her state have indicated that they may leave the market.

The concern of carriers, Cline continued, is that they could actually operate at a loss, a possibility that increases for start-ups with more overhead who are not yet benefitting from the law of large numbers afforded larger carriers who cover more people.

Praeger added that there is concern among some carriers that if they do not meet MLRs, they may need to issue rebates. And, Cline noted that in states such as West Virginia where MLRs are in the 60% range, an increase to 80%, could have a major disruption. McCarty noted that it is a paradigm shift and that not all companies will be successful by virtue of a phase-in. Some companies may have to adjust their business plans, he added.

When asked about federal financial aid to states to help them in their work, Praeger said that in addition to an initial $46 million grant, there may be additional aid to help with establishing rate authority. However, she said, going forward the process will be more needs based and more competitive. State agencies including state insurance departments, Medicaid directors and governors through the National Governors Association, Washington, are working together to try to ensure there is sufficient aid to help with the law’s new implementation, she added.

NAIC Seeking Input on STOA Alert

State insurance regulators are seeking input by Oct. 8, 2010 on a draft model bulletin on stranger-originated annuities. The transactions which were first identified in Rhode Island created a storm of interest that resulted in a hearing in Washington, D.C., this past May.

Commissioners at the National Association of Insurance Commissioners, Kansas City, Mo., maintained that there are tools regulators currently have available to address any abuses in the sale of annuities to senior citizens. But they agreed that a bulletin would be an effective and speedy way to address the issue.

The draft, based on an Ohio STOA alert encourages insurers to “put safeguards in place to prevent or limit their exposure to stranger-originated annuity transactions.”

The draft bulletin states that “As the financial implications of stranger-originated annuity transactions could be detrimental to both companies and consumers, it is suggested that companies:

 Review chargeback policies to ensure agent commissions are adjusted if a policy is annuitized within the first year of the contract.

 Create detection methods to identify agents who may be involved in the facilitation of stranger-originated annuity transactions.

 Review all annuity applications to ensure specific questions are posed with regard to an annuitant’s health status and the manner in which the contract is being funded.

 Ensure the underwriting department has red flags established so questionable applications are referred for additional review.

 Report potential stranger-originated annuity transactions to the appropriate Department of Insurance.”

Tuesday, September 21, 2010

PCI Convenes Leading Industry Investment Event

The Property Casualty Insurers Association of America (PCI), Des Plaines, Ill., is hosting over 100 insurance leaders in Williamsburg, Va. to discuss the current economy and investment strategies for insurers.

In a rapidly changing economic environment, the PCI Investment Seminar program is designed to provide the most relevant and helpful information to insurance industry CEOs, CFOs, chief investment officers and investment staff as well as top analysts and strategists. This week’s agenda features industry investment experts addressing topics such as: the U.S. economy; investing in equity and credit markets; alternative investments; financial reporting; implementing ERM and more.

“Our mission is to provide an opportunity for insurers and top investment analysts to discuss the current economy and evolving investment strategies,” said Jim Olsen, PCI’s senior director of accounting and investment policy. “We are witnessing the ever-increasing globalization of the capital and insurance markets and historical changes in U.S. and international financial regulation. Our seminar reflects PCI’s mission to promote and protect the viability of a competitive private insurance market for the benefit of consumers and insurers as we continue to emerge from the economic crisis and plan for the future.”

In June, PCI hosted the first Global Issues Financial Seminar in Washington, D.C. The two-day program featured a robust discussion on the latest international accounting and solvency regulation issues that will affect the bottom lines of U.S. insurers.

Treasury Announces Hartford Financial Services Group Offering

The U.S. Department of the Treasury announced a secondary public offering of 52,093,973 warrants to purchase the common stock of The Hartford Financial Services Group, Inc., Hartford, Conn.

Proceeds will provide an additional return to the American taxpayer from Treasury's investment in the Company beyond the dividend payments it received on the related preferred stock. The offering is expected to price through a modified Dutch auction.

Deutsche Bank Securities Inc. is the sole book-running manager and Aladdin Capital LLC, Cabrera Capital Markets, LLC, Lebenthal & Co., LLC, Sanford C. Bernstein & Co., LLC and SL Hare Capital, Inc. are the co-managers for this offering. The auction will be held on Sept. 21. The minimum bid price is $10.50 per warrant.

Monday, September 20, 2010

Annuity Disclosure Model in the Home Stretch

Efforts to require strong disclosures for consumers is nearing completion as state insurance regulators are promising to wrap up the Annuity Disclosure model regulation draft and send it to the Life Insurance & Annuity “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo., on Oct. 1.

Work will then begin on an Annuity Buyer’s Guide so that the work can be moved through the “A” Committee at the fall NAIC meeting in Orlando, Fla., in October, according to Jim Mumford, chair of the working group and first deputy insurance commissioner with the Iowa insurance department.

During a discussion on final points in the model, Brenda Cude, a professor at the University of Georgia and an NAIC funded consumer, said that it would be worth discussing what the purpose of an illustration should be. If it is to help understand the purpose for an market value adjustment (MVA,) that is one reason, but if it is not the illustration’s purpose, then there needs to be a discussion of what the purpose should be, she said.

There was also discussion of wording in the draft including changes in non-guaranteed elements of annuity contracts and how it is important to remove the wording “better and worse” and replace it with the concept of “higher and lower” and how changes in the market will impact the MVA.

Kelly Ireland of the American Council of Life Insurers, Washington, wanted to make sure that language in disclosures was standardized and that insurers didn’t have to look at every individual disclosure form for individual contracts.

The working group’s Mumford said that regulators just wanted to be certain that companies have control over the illustrations accompanying their products.

During the conversation, Lee Covington of the Insured Retirement Institute, Washington, noted the need for annuity products today as boomers near retirement. He submitted a draft of an annuity buyer’s guide and a summary prospectus and what they could contain.

Friday, September 17, 2010

Treasury Announces Lincoln National Warrant Pricing

The U.S. Department of the Treasury announced today that it priced a secondary public offering of 13,049,451 warrants to purchase common stock of Lincoln National Corporation , Philadelphia, at $16.60 per warrant. The aggregate net proceeds to Treasury from the offering are expected to be $213,671,319. These proceeds provide an additional return to the American taxpayer from Treasury's investment in the Company beyond the dividend payments it received on the related preferred stock. The closing is expected to occur on or about Sept. 22.

Thursday, September 16, 2010

Huff Named NAIC Rep for FSOC

Missouri Insurance Director John Huff has been voted to represent state insurance commissioners at the Financial Stability Oversight Council, department spokesperson Travis Ford confirmed. The commissioners of the National Association of Insurance Commissioners, Kansas City, Mo., voted to name Huff approximately two weeks ago.

The NAIC was granted one seat on the 10-seat council designed to monitor systemic risks.

Separately, work on the medical loss ratio by the NAIC’s accident and health working group is at the point where a model several issue resolution documents are ready to be finalized on Sept. 20 and a model regulation may be ready for exposure by the end of September.

The IRDs that are ready for a vote are IRD 28 addressing multi-state employer plans and IRD #77 addressing the dual option of transferring claims around.

Much of the discussion was about three year averaging of rebates for 2010, 2011 and 2012 and whether any individual year was given too much weight and how an equitable method can be reached that brings the average near to an 80% MLR. For instance, it was pointed out that for 2011 estimates, one reason why the MLR falls below 80% is that it was priced before the Patient Protection and Affordable Care Act (PPACA) was passed. Steve Ostlund, an Alabama regulator who is spearheading the discussions, said that regulators will proceed with the approach unless industry can come up with compelling reasons to reconsider the current work.

Consumer reps said that they still had some concerns about the credibility table but realize that at some point the work needs to advance.

Wednesday, September 15, 2010

Schneiderman Wins Dem Primary Race for New York Attorney General

Unofficial results indicate that Eric Schneiderman has won the Democratic primary race for New York Attorney General.

Former New York insurance superintendent Eric Dinallo was one in a field of five candidates vying for the spot. Schneiderman will face off on Nov. 2 general election against Republican primary victor Staten Island District Attorney Dan Donovan.

Dinallo placed fifth with a total of 46,267 votes, 8 percent of the number of ballots cast, according to The New York Times. At the time of this posting the New York State Board of Elections had not yet posted primary results.

Schneiderman garnered 201,805 votes, 34 percent of the voting total. He was followed by Kathleen Rice with 188,298, 32 percent of the total; Sean Coffey, with 97,557 or 16 percent; and Richard Brodsky with 57,906 or 10 percent of the total votes cast in the Democratic race.

Tuesday, September 14, 2010

NCOIL to Hold Further RAA Discussions

In an effort to reach a resolution by the fall meeting of state insurance legislators, a series of calls are planned to address potential issues associated with retained asset accounts and the need to create a Beneficiaries Bill of Rights, according to Rep. Robert Damron, D-Nicholasville, Ky., president of the National Conference of Insurance Legislators, Troy, N.Y.

During an initial discussion, Damron says that a large part of the discussion centered on whether death benefits would be placed in RAAs by default if a beneficiary does not identify a preferred method of receiving benefits. Damron maintains that there should not be a simple default into an RAA.

Comments received from interested parties include:

--The American Council of Life Insurers, Washington, “During the past few weeks, retained asset accounts have been falsely portrayed as anti-consumer and lacking sufficient disclosures. We completely disagree and assert, to the contrary, that these accounts provide a valuable service to policyholders and their beneficiaries and are the best settlement option available.” ACLI noted that a beneficiary can “transfer the entire balance of his or her retained asset account into a bank account immediately upon receipt or anytime thereafter, just as if he or she had deposited a bank check into his or her bank account.”

ACLI is proposing an enhanced sample bulletin and recommending that NCOIL adopt the same approach including a requirement that at the time of claim, a notice to the beneficiary should include:

1) The benefit payment options available for selection;
2) Notification that a beneficiary has access to the full value of his or her account once the account is established;
3) Whether the account is held within a depository institution account or the insurer’s general account;
4) Whether the account funds are protected by the FDIC.
At the time of delivery of the retained asset account, notice to the beneficiary should include:
1) Notification that the beneficiary has access to the full value of his or her account;
2) The amount of interest that the account will earn and how the interest rate is determined;
3) Whether any fees and charges may be assessed on the account and their amount (e.g., for
overdraft), and whether there is a minimum amount for which a check or draft may be written;
4) Whether the account funds are protected by the FDIC or a state guaranty association (for those
states that require delivery of a guaranty association disclosure notice);
5) Insurer contact information in case the beneficiary has any questions.

--From Connecticut Insurance Commissioner Tom Sullivan, chair of the Life & Annuities “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo., comes a call not to rush to judgment and to gather “facts” which he says neither NCOIL nor the NAIC have at this point. He also noted that model laws can take years to put in place while bulletins can be enacted more quickly.

--From the Center from Economic Justice in Austin, Texas, comes a suggestion that the definition of a retained asset account in the July 1995 NAIC model bulletin be changed to:

“Retained Asset Account means any supplemental contract, policy provision, agreement or other mechanism by which an insurer does not make immediate cash payment of the full benefit amount of a life insurance policy. Retained asset accounts include, but are not limited to, agreements in which the insurer holds the death benefit and issues a “checkbook” or other means of accessing the death benefit funds in the future.”

The CEJ also made recommendations including suggestions that A consumer or policyholder makes an affirmative selection of a retained asset account instead of immediate cash payment as the benefit settlement procedure for the policy. The retained asset account option may not be the default benefit settlement option. And CEJ suggests that an iinsurer, at least annually, obtains affirmative ongoing selection by the policyholder of the retained asset option instead of immediate cash payment as the benefit settlement procedure for policy. Additionally, CEJ is recommending that an insurer provide a monthly statement.

--From the Center for Insurance Research, Cambridge, Mass., comes a suggestion that RAAs be specifically identified in annual statement reporting so that they are distinguishable from other types of supplementary contracts. And, CIR is recommending that insurers be required to disclose whether RAA funds are held in a general account or elsewhere.

--From Louisiana Insurance Commissioner James Donelon comes a statement that in Louisiana RAAs have not been a problem but that if NCOIL decides to proceed with a Bill of Rights, then it should be expanded to cover “any type of account or investment in which the insurer retains any interest in the death benefit, whether directly or indirectly, including through a related party, and any method of payment other than a lump sum payment.”

--From the Pennsylvania insurance department comes the recommendation that removing RAAs as a default may be premature and that they can be a “suitable option” for distributing benefits.

--From Washington Insurance Commissioner Michael Kreidler writes that he is not convinced RAAs are “necessarily a bad thing.” He recommends focusing on disclosure, security and fiduciary management. He also recommends “clearly defining the security to which RAAs are entitled.”

Damron also addressed a possible review of NCOIL’s life settlement model as well as a model that would require insurers to disclose all options if a contract is about to be surrendered or to lapse. He said that state legislators will first look at life settlement laws around the country before making a decision on whether the settlement law needs to be changed. But he said that the disclosure model law would advance.

Sunday, September 12, 2010

Deferred Tax Issue Still On Radar

Deferred Tax Assets are getting discussion again in preparation for the release of a report by the American Academy of Actuaries, Washington, on Sept 15.

DTAs are differences between GAAP tax accounting and statutory accounting that are reflected on company balance sheets. They are used in the calculation of company risk-based capital ratios. DTAs are also used generally in accounting by taking prior losses and using them as a tax offset against current company income.

The issue is one that state insurance regulators have been addressing for a year-and-a-half. At the height of the financial meltdown, regulators dealt with a request from life insurers that included relaxing capital and surplus requirements so companies could more efficiently use capital. Part of that discussion included treatment of DTAs.

The preliminary report states that DTAs are not volatile in isolation but rather is a function of the underlying assets and liabilities. It continues that risks associated with DTAs are:

--Inability to generate taxable income of the right character to realize the DTA,
--Extension risk, i.e., the inability to generate taxable income soon enough to realize the DTA, and
--The risks that federal legislative or regulatory tax changes could impact the value of the DTAs before they are realized.

The Academy writes that “the first of these risks is the only one of major significance.”

The results of the review, according to the Academy, will be considered for implementation in the RBC formulas for year end 2011 or later for life, property-casualty and health lines of business. However, it continues, the review will not address the temporary change to statutory DTA for 2009 and 2010.

Among the preliminary recommendations that Academy is making are that the RBC charge should reflect the company’s level of capitalization, as measured by the RBC ratio calculated without the Admitted DTA in Adjusted Capital. And, it continues in its report, “If current (or similar) capping procedures are maintained, it is recommended there should be no charge in the RBC formula for reasonably well capitalized companies given the resulting implicit ‘RBC charge’ of the capping procedures. Weakly capitalized companies should still be subject to a 100% RBC charge of the admitted DTA.”

During the discussion among regulators of the National Association of Insurance Commissioners, Kansas City, Mo., several points were raised by Academy representatives:

--the Academy working group found no concerns with the current way tax sharing is done among company groups;
--in response to a question about whether tax credits should be allowed for weaker insurers with lower RBC, the Academy noted that “RBC should be appropriate for weak companies. If you can’t make use of tax credits, they shouldn’t be used…” The Academy says that it has decided that the particular question relates to the broader RBC formula and would require significant changes that are out of the scope of the Academy’s charge from regulators.
--Fraternals don’t pay taxes so there are no DTA considerations; and,
--the Academy noted that as an insurer’s RBC position becomes weaker, the portion of DTAs that are included in non-admitted assets grows.

Regulators listening to the report raised questions that need further examination. Denis Luzon, a New York regulator, asked whether both the DTA is competing with other tax offsets for the same gains the insurer is reporting.

And, Peter Medley, a Wisconsin regulator expressed concern that the report may not be taking into account the credit risk of the holding company and whether the insurer in a holding company structure will actually receive the DTA.

Saturday, September 11, 2010

Nine Years but Like Yesterday

It seems hard to believe that nine years has passed since 9/11. The morning was crystal clear, with a blue that covered Manhattan like a late summer blanket. A beautiful day wasted. Many beautiful lives wasted. The promise of what they were yet to contribute, gone.

Among them were many brilliant, hard working people in the insurance industry like the employees of Marsh & McLennan including Charlie McCrann who attended meetings of the National Association of Insurance Commissioners for many years. And others including former New York Superintendent Neil Levin; and Vita Marino, an insurance industry analyst with Sandler, O’Neill & Partners. And many in the financial services field like those at Cantor Fitzgerald.

Today is much like that day nine years ago: crystal clear, deep blue skies and one of the last warm days of summer. And in a sense, listening to the television and hearing names being read including Levin’s, there is a continuity to that day nine years ago because it is obvious that those who lost their lives are still very much alive to their loved ones and loved by their loved ones. Two planes can’t take that away.

We remember you and we honor you.

Saturday, September 4, 2010

Annuity Disclosure Discussion Focuses on What Serves the Consumer

Efforts to finalize an annuity disclosure model regulation are focusing on how to balance the need for oversight of illustrations for non-guaranteed elements in annuity products with insurers’ desire to make keep the annuity market healthy at a time when a swell of baby boomers may need regular income.

The discussion over the Annuity Disclosure Model Regulation is part of an effort to wrap up the effort at the National Association of Insurance Commissioners, Kansas City, Mo., and advance it toward final adoption. Connecticut Commissioner Tom Sullivan, chair of the NAIC’s Life & Annuities “A” Committee has made it clear that he wants the Annuity Disclosure working group to advance the draft to the “A” Committee by the NAIC fall meeting in Orlando next month.

As part of that effort, Jim Mumford, the working group chair and first deputy commissioner with the Iowa insurance department, has set up a series of conference calls to finish work within the month. The discussion on Sept. 3 included an explanation by Mumford of when annuity companies would be allowed a safe harbor from disclosure requirements. Companies which have variable annuities that are in compliance with the Securities and Exchange Commission or Financial Industry Regulatory Authority rules would satisfy the regulations requirements, Mumford explained. If the SEC has not developed a summary prospectus for variable annuities before Jan. 1, 2013, companies would be required to comply with Section 5 of the regulation after that date.

A Buyers Guide would have to be provided for variable annuities, similar to current requirements for fixed annuities. If an illustration is provided, it would have to be used for all sales made on that particular product.

The safe harbor was developed because of concern among VA writers that there would not be sufficient time to prepare for new requirements, according to Mumford.
Lee Covington, senior vice president and general counsel with the Insured Retirement Institute, Washington, emphasized the importance of guaranteeing income and the priority the Obama administration and Congress is giving the issue. “We are trying to reduce the barriers to annuities and 401(k)s. We want good regulation but not something that will restrict the product.”

Feedback from distributors, according to Covington, suggests that illustrations should not be mandatory for all contracts in a policy form. A mandatory illustration requirement would be cumbersome to consumers and advisors, he added.

Variable annuities are already regulated and if there is a not in good order (NIGO) designation because of illustration requirements then distributors’ reps are less likely to recommend them, Covington added.

Wire house stock brokers want to drop a ticket on the same day and if they have to wait three days until disclosures are provided, they are not going to do that, he added. Some companies will choose not to use illustrations, he continued. That would deny advisors and consumers who find them useful, the right to use them, according to Covington.

Ron Panneton, senior counsel-state and government relations with the National Association of Insurance and Financial Advisors, Falls Church, Va., said that the purpose for illustrations it to help customers and flexibility on their use is needed to avoid a situation that could be “disruptive and confusing to the sales process.”

Mumford responded that the requirement that an illustration be used for all contracts in a particular policy form was to stop the use of an illustration only when it was good for the seller and not the buyer. “I have a tough time allowing producers to produce one when they want and not produce one when they don’t want to.”

Eric Dupont, assistant vice president and government relations counsel with MetLife, New York, said that illustration software is developed by Met Life and its producers can only use that software which is compliant in all states. But the discussion turned to third party software and how regulators needed to address that issue.

There is not a mandatory illustration rule for securities and to require one for annuities is setting up an uncompetitive situation, according to Kim O’Brien, executive director of the National Association of Fixed Annuities, Milwaukee. If an advisor wants to make a comparison of two contracts, it takes away that evaluation process from the advisor if a company decides not to illustrate for any annuity rather than to meet the requirement to illustrate for all annuities of a particular policy form, she added.

Utah regulator and actuary Tomasz Serbinowski, asked about products that are not officially designated to be illustrated and what actually constitutes an illustration. “Do we have a clear rule about what it means to be illustrated?” Regulators need to “figure out what it is that bothers us if an annuity illustration is shown to consumers,” Serbinowski said.

Wednesday, September 1, 2010

First, the Good News

It’s that time of year again. Every September the life insurance industry celebrates Life Insurance Awareness Month.

This year LIAM starts off with some mixed news. The good news is that for the second consecutive quarter, individual life insurance sales improved. In the second quarter 2010, total individual life insurance new annualized premium grew seven percent, resulting in a nine percent increase for the first six months of 2010, according to LIMRA's U.S. Individual Life Insurance Sales survey.

The not so good news is that the economic downturn has contributed to ownership of individual life insurance falling to a 50-year low, LIMRA, Windsor, Conn., adds.

The Trends in Life Insurance Ownership study, conducted every six years by LIMRA, found that only 44 percent of U.S. households have individual life insurance. The number of U.S. households that have no life insurance whatsoever is growing. Today, 30 percent of households (35 million) have no life insurance coverage, compared to 22 percent of households in 2004. Among households with children under age 18, which arguably have the greatest need for life insurance, 11 million have no coverage.

LIMRA says that more than 40 percent of Americans say a major reason they have not bought more life insurance is because they have other financial priorities right now, such as paying off debt or saving for retirement. However, it adds, the drop in life insurance ownership is not because families are not feeling vulnerable. Among households with children under 18, four in 10 say they would have immediate trouble meeting everyday living expenses if the primary breadwinner died today. Another three in 10 would have trouble keeping up with expenses after several months, according to LIMRA. Half of households feel they need more life insurance — the highest level ever.

But there is some more good news to supplement the second quarter results. The LIMRA study does find that 24 percent of households with children under 18 want to speak with a financial professional about their life insurance needs; and a quarter of all households plan to buy life insurance in the next year.

The first step that needs to be taken is to teach consumers about the value of life insurance. The point was driven home when a handyman who was doing some work for me asked what would be a wise way to save for his family. He had a young wife, a toddler and another one that was about to be born. His wife was pressing him to buy life insurance. I told him she was right. It wasn’t the answer he wanted. The job got done but I’m pretty sure the insurance policy didn’t get written.

The second step is to help people to learn how to buy contracts as Robert Kerzner, CLU, ChFC, president and CEO of LIMRA, LOMA, and LL Global, points out when he says that "as an industry, we need to reach out to consumers and educate them about the various ways they can purchase life insurance."

And, the third step is to make people comfortable with life insurance which means providing information when there are flare ups such as the current retained asset account issue. The industry has to provide information as it did during a recent public hearing at the summer meeting of the National Association of Insurance Commissioners, Kansas City, Mo. And, it has to stand ready to offer better disclosure or any other remedy available if regulators determine that better safeguards are needed. Or to work with state insurance legislators including state Rep. Robert Damron, D-Nicholasville, Ky., to help create a Beneficiaries' Bill of Rights, if that will bring more comfort to the consumer. Damron introduced the model as a response of the National Conference of Insurance Legislators, Troy, N.Y.