For Insurance Companies, Is a Crisis Looming?

With indications of needs for continuing bailout at AIG, the spotlight has turned from banks to insurance companies as potential sources of crisis. As we can see from the insurance index above ($KIX), that sector has been more than cut in half since September and is now sitting at bear market lows, below its declining 40-day VWAP (green line).

One economic factor that could turn recession into depression for millions of families would be the loss of life insurance and retirement annuity benefits that many families depend upon. With financial ratings of life insurers being cut and no clear indications of government support, this may be the unappreciated side of the current financial crisis.

Comments

[HiSpeed:]

The situation is well past the typical "bad to worse".

The government will come in to support them should the situation require it. For an idea of what becomes of shareholder value, one need only pull up a stock quote for AIG.

Feb 27 11:56 PM

[crowdofchee...:]

Boomers are fuct. What I DON'T APPRECIATE is their final act of hubris in insisting we bail out a bunch of criminals for nothing in return so in order to keep their final illusion of having a TV commercial style retirement. It really makes me puke a little bit up in my mouth.

Guess what Boomers, not only are you not gonna get that TV style retirement, but also since you insist on believing in these bailouts, your own kids won't be able to take care of you in your senescent days like you might have wanted. You have fun now.

Feb 28 01:13 AM

[Urbane Gori...:]

Nobody likes what's happening right now. It's like going to the dentist. Not pleasant, but necessary.

But, I'll let let you in on a secret that seems to have escaped your intellectual ramblings: The younger generation always thinks it is supporting the older generation and the younger generation, never seems to be aware of the support that they have received. I'm not a boomer, but I do recall being pissed that I had so much social security pulled from my meager paycheck to **lavish** on those wealthy retirees, riding around in their Caddies, golfing and going out to plays and great meals on my buck! Somewhere in the mix, I didn't notice that I was driving on roads, going to colleges, watching the tube and at times collecting unemployment all off the sweat of the generation that preceded me. In case you missed it in high school, it's called 'the Social Contract'. Quit whining and grow up. Saving the banking system benefits everyone, even the younger generation.

jegan


On Feb 28 01:13 AM crowdofcheerleaders wrote:

> Boomers are fuct. What I DON'T APPRECIATE is their final act of
> hubris in insisting we bail out a bunch of criminals for nothing
> in return so in order to keep their final illusion of having a TV
> commercial style retirement. It really makes me puke a little bit
> up in my mouth.
>
> Guess what Boomers, not only are you not gonna get that TV style
> retirement, but also since you insist on believing in these bailouts,
> your own kids won't be able to take care of you in your senescent
> days like you might have wanted. You have fun now.

Feb 28 02:37 AM

[eternitus:]

Jegan,
Do some research and see how different it is for the younger generations (x and especially Y). The system you helped build forced them into enormous amounts of debt (college is much more expensive than it has ever been when adjusted for incomes.... impossible for them to buy affordable homes, which bebefited boomers at the expense of first time buyers, etc.). That is the "support" that the younger generation has received. Now, look at the difference between social security 20 years ago and now... used to be something like 10+ workers for every retiree and now, when the boomers retire there will be 3. that means younger generations will have to shell out much more on a relative basis than the boomers did. Do I even need to mention the debt boomers are leaving behind? Boomers have damaged this country... good thing America is too good to ruin.

Don't worry... when you are old and out of power, we'll get you back.

Feb 28 06:40 AM

[insuranceguy:]

The fact is that while AIG has become the putative poster-child for failures in the insurance industry, it is not the insurance companies within AIG that are the problem. All of AIG's insurance operating companies are very well capitalized and financially sound. The problem - and, indeed, it is a massive one - lies at the holding company level, and from there to a non-insurance subsidiary of AIG which engaged in the pretty outrageous conduct that is causing the meltdown.
Does this mean that there are no problems in the insurance industry? No, of course not. Remember, however, that insurance is a highly regulated industry (which is one of the reasons that AIG cannot simply upstream the tens of billions of dollars sitting in its insurance companies' reserves). Regulation may or may not always be the answer, but in this case it has served the insurance industry pretty well.

Feb 28 07:44 AM

[Joyful Alte...:]

insuranceguy is right, and especially so for life insurance companies. They're not invulnerable, but they're not AIG.

Feb 28 08:19 AM

[billp37:]

Us Sandia Labs retirees are paid by PRU. Same with JPL retirees.

We are conerned.

More trouble?

"That foolhardy belief, in turn, led A.I.G. to commit several other stupid mistakes. When a company insures against, say, floods or earthquakes, it has to put money in reserve in case a flood happens. That’s why, as a rule, insurance companies are usually overcapitalized, with low debt ratios. But because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn’t have to put anything aside for losses. And it didn’t. Its leverage was more akin to an investment bank than an insurance company. So when housing prices started falling, and losses started piling up, it had no way to pay them off. Not understanding the real risk, the company grievously mispriced it.

Second, in many of its derivative contracts, A.I.G. included a provision that has since come back to haunt it. It agreed to something called “collateral triggers,” meaning that if certain events took place, like a ratings downgrade for either A.I.G. or the securities it was insuring, it would have to put up collateral against those securities. Again, the reasons it agreed to the collateral triggers was pure greed: it could get higher fees by including them. And again, it assumed that the triggers would never actually kick in and the provisions were therefore meaningless. Those collateral triggers have since cost A.I.G. many, many billions of dollars. Or, rather, they’ve cost American taxpayers billions.

The regulatory arbitrage was even seamier. A huge part of the company’s credit-default swap business was devised, quite simply, to allow banks to make their balance sheets look safer than they really were. Under a misguided set of international rules that took hold toward the end of the 1990s, banks were allowed use their own internal risk measurements to set their capital requirements. The less risky the assets, obviously, the lower the regulatory capital requirement. ..."

www.nytimes.com/2009/0...

Feb 28 09:37 AM

[Sentinel:]

Just had to transfer my car insurance from one state to another. (Lost my job...had to move in with the in-laws for a time)

I won't say who it is with but it is one of two car insurance companies who have annoying characters as pitch-men (women).

I was complaining how astronomical my rates went up after simply moving to this state and why. During the course of the conversation about health care costs in this state, she mentioned how the insurance industry is the next shoe to drop in the financial crisis. She said how she couldn't in good ethics tell her customers which companies were in very bad shape in terms of pitching her company vs. theirs. But I got the real sense from this insider that insurance companies are about to add to the general chaos in the markets.

Feb 28 09:37 AM

[user344210:]

Insurance companies have probably the most legitimate gripes of any industry with the whole mark-to-market accounting rules. Most of the corporate bonds and securitizations that insurers buy will be held to maturity, yet they are forced to take marks when holders of those same or similar bonds/securitizations sell to meet short-term obligations. Special exemptions from rules often lead to abuse, but if we want to have a vibrant life insurance/annuity industry in this country, we need to take a hard look at how these mark-to-market rules impact the balance sheets of these companies.

The commercial real estate crash that's just getting started is the epicenter of the "looming crisis", if you ask me. CRE is a huge component of almost every life insurance portfolio.

That said, the insurance companies themselves shot themselves in the foot by adding complicated features to their annuity products and not pricing them correctly and not correctly forecasting the risks associated with these products.

In the end, I think some publicly-traded insurers are going to consider re-mutualizing. The mutuals seem to be chugging along OK, especially the bigger-name mutuals like NY Life and Northwestern Mutual. Again, I think it comes down to not being subject to mark-to-market accounting.

Feb 28 10:43 AM

[Timmothy Posey:]

The rumor a few days ago was that Geithner was minutes away from approving TARP money for Insurers. However, that never happened in that 'failed speech'. Thus, the insurers are now trading like financials, without the extra TARP capital or any kind of promised gov't backstop.

It's one thing for a bank to fail (and the FDIC steps in), and its a whole 'nother thing to let an insurance company fail and they stop paying annuities and death benefits.

Feb 28 10:48 AM

[F. Bradeen:]

I get sick and tired about the complaints about mark to market accounting. All I know is if I am on margin and the price of my stick drops too far, I get a margin call via mark to market regardless of its 'long term' value. end of discussion. Don't drop mark to market rules.

Feb 28 12:13 PM

[morph366:]

The dominoes are falling and the spreading gloom reminds me of an old joke that used to be told by door-to-door salesmen - As one door closes another slams in your face

Feb 28 12:19 PM

[TomL99:]

Everything else aside (especially AIG), I remain concerned about the viability of life insurers -- the ones who sell indexed annuities. It was less than two years ago that a financial advisor pitched a "can't lose" indexed annuity to me, that would guarantee a return of x% or the increase in the S&P 500, whichever was greater. I asked him what would happen if we had consecutive years of sharp declines in the S&P 500 -- how could the life insurer continue to fund this product? All I got was a blank stare, and then a reassurance that this company was very sound financially. And we all know what has happened in the last two years, and will continue to happen for the next year or two, with the decline in the stock market. Watch for the next shoe to drop in the insurance industry, as insurers have to face this issue head on.

Feb 28 12:27 PM

[Augustus:]

I sure agree with your point. I wonder if all of the complainers about Mark to Market believe it would be OK for me to cash out of my Mutual Funds based upon last August's values. That would leave them holding the rest and they could believe that their shares were worth the same as last August also.


On Feb 28 12:13 PM F. Bradeen wrote:

> I get sick and tired about the complaints about mark to market accounting.
> All I know is if I am on margin and the price of my stick drops too
> far, I get a margin call via mark to market regardless of its 'long
> term' value. end of discussion. Don't drop mark to market rules.

Feb 28 05:51 PM

[ACE, AIG an...:]

Great topic - what's more interesting is the position AIG has left its survivors in like ACE limited:

To your question about the Risk of holding ACE Stock...

Lets examine the position of holders of ACE stock...and do so by looking at 2 critical values: Book Value and Market Value...A company's Book Value is derived from its balance sheet. It reflects the overall value of a company and is the fundamental worth of a company - the term ‘company fundamentals’ is widely used in the stock market. A company's market value (or the market value of its stock) is determined on the basis of the investor’s impression of the "potential" of a company’s stock to perform well in the medium to long term. So now that we have a clear distinction of these two terms lets now apply them to ACE's stock. ACE has a market value of $12.18Bn (approx) - ACE has a book value of $14.4Bn (approx). When market value continues to hover or drop below book value, 2 clear issues materialize for holders of that stock. (1). The selling price of the stock they hold, relative to its face value or paper value, is declining relative to any point in time after the last decline (for e.g., to prove this simple fact, just take Friday's stock value and add it to ACE's stock value 3 months ago - draw a straight line between the 2 (to visualize the decline) then divide by the number of elapsed days and you will get the “decay coefficient” for holding ACE's stock for each additional day in the last quarter) – NOT GOOD NEWS is it?. In other words, the longer you hold the stock, the more value you lose! (2). A large enough number (i.e., statistically significant number) of other investors and analysts in the market believe the stock's potential is decaying fast enough to warrant their off-loading the stock and are thereby suppressing the price further. The reason most stocks go into decline is "market confidence" in a company and its management team. When stocks decline, most analysts remain "very quiet" - Why? they don't want to be accused of "talking the stock into decline" by the company's management teams resulting in their being "locked out" of the company's inner circle. As I stated in an earlier communication, the earnings calls are "MANAGED" and therefore USELESS to the normal investor. Now let’s look at their Balance sheet - Acquiring Combined Insurance was a BAD idea (these types of poor decisions are why the market would not trust the management team to create value in the future). They acquired $2.4Bn of additional liabilities (in the form of Future Policy Liabilities) during the acquisition and further compromised their own consolidated balance sheet. This marked an increase in ACE’s Future Liability Reserve of 433% over the 2007 reserve balance ($2.94Bn in 2008 Vs only half a Billion in 2007)??? This suggests they may have re-assessed their own future liabilities and gone out looking for an acquisition with a disproportionately large reserve liability in order to cover their own "potential future policy losses". Right-away, this implies a premium deficiency existed in their balance sheet and they needed to address it. FASB60 requires any such material increases to be specifically noted in their Notes to the account – ACE said very little about the increase because they knew the market would savage their stock price further. Typically, the markets don’t say very much even when they note these “silent passes” but in return, they reciprocate with their own votes of silence! – Run out of time…

Strong Sell – And undertake the exercise – PROVE THE FACTS!

MARKETWATCHGURU! Over and Out


Sentiment : Strong Sell

Feb 28 07:34 PM

[ACE, AIG an...:]

ACE is a great example of a company that has destroyed immense amounts of value over the years more recently as much as 96% (hence the reason why S&P has been largely negative towards them). One of the real problems with so called "insurance industry" people is that they try to give investors and analysts the impression that their industry is so different from other companies. ITS NOT! The same factors that make up an insurance company make up any other company in any other industry. They earn revenues and they incur costs. The only difference is that the Loss Ratio is turned upside down so a 90% loss ratio implies 10% (i.e., reciprocal values) profitability. Other companies simply point to the 10%, not the 90%. The difference is cosmetic! You speak of E. Greenberg's earnings calls - To be blunt, I'm not interested - and neither should anyone else be who wants the facts on how best to invest their hard earned money - those calls are "MANAGED" and give analysts "bare bones" about the true state of any company's operations. Moreover, he runs the company - and so would naturally be expected to be as biased toward the company as any one could be - his view does not count! (the basic tenet that we should "see ourselves as others see us" is only true if THE INVESTORS have near perfect knowledge of all the key factors that drive results - More often than not, WE DON'T! To "even out" the playing field we often have to rely on other data sources outside of the ones that have failed us so miserably in the past (such as the S&P to use another GREAT example). Among all the others, the S&P is one of the least reliable set of analysts out there today. The "BLACK BOXES" they use tell us nothing about the true factors they feed into their models and I only know how their models work because I have examined the types of models they use and know they are intrinsically "FLAWED"! Ask yourself a simple question - Among others, is the S&P not among the long list of analysts who placed "FLAWED" values on the numerous Asset Backed and Mortgage Backed Securities (ABS and MBS) that have since TANKED and caused the enormous FINANCIAL MELTDOWN we are facing right now?. If their methods were so reliable, why did'nt they not only see but WARN us of the imminent danger these markets faced - Is'nt that their BUSINESS? Unlike many I have a very healthy view of how to make decisions - IT MEANS LOOKING AT ALL THE FACTS - NOT JUST THE ONES PRESENTED TO ME BY THE PEOPLE WHO WISH TO SLANT MY VIEW OF THEIR TRUE OPERATIONS. Try not to be offended - but the facts speak for themselves. Right now ACE's market value is now almost 20% below its book value - that would make a handsome return for an interested acquirer! Why, because it suggests that ACE's management team is incompetent! What the acquirer would need to do is acquire ACE Limited, sack the management team, turn the company around and immediately revitalize the 20% loss margin, through which they would regain market confidence and then reap the benefits of the rise in market value that would follow - at some point, a competent management team would rebuild market value to the point where it exceeded Book Value by factors of between 1.5 and 2. We need to educate investors to many of these basic facts - examining a companies P&L account or its COMBINED RATIO gives is a false and backward looking indicator of performance and tells them NOTHING ABOUT THE COMPANIES FUTURE PROFITABILITY. I like the discussion - lets see if we can examine this company further - I have much more that I have not yet presented to the readers of MARKETWATCHGURU!


Sentiment : Strong Sell

Feb 28 07:37 PM

[billp37:]

"Friday February 27, 7:44 pm ET

CHARLOTTE, North Carolina (AP) -- The outlook for U.S. life insurers dimmed badly on Friday after an across-the-board downgrade from a key ratings agency sent stocks of major companies in the industry plunging by 20 percent or more. ...

Share of major life insurance companies took a beating Friday. MetLife plunged 23.1 percent, Hartford lost 14.8 percent, and Conseco fell 21.9 percent. Aflac Inc. lost 11.6 percent, and Principal Financial Group Inc. sank 24.6 percent. ..."

biz.yahoo.com/ap/09022...

Feb 28 09:55 PM

[user344210:]

If you're referring to my comment, I am not an opponent of "mark to market" except where it is clearly a case of a distressed market and the holder clearly intends to hold to maturity. Obviously, these cases are true for life insurers holding RMBS and CMBS as well as other assets. Of course I support mark to market in most instances, but I don't see any reason to be an absolutist about it. My position is generally consistent with the revised FASB position, although I would strengthen it to provide more protection for long-term holders of securities, in order to enable them to avoid the more "pro-cyclical" aspects of mark-to-market.

Again, with mark-to-market in place, there is little reason for a life insurance company to be publicly traded. I am fine with a life insurance industry made up totally of mutual companies, if it comes to that, which it might.


On Feb 28 12:13 PM F. Bradeen wrote:

> I get sick and tired about the complaints about mark to market accounting.
> All I know is if I am on margin and the price of my stick drops too
> far, I get a margin call via mark to market regardless of its 'long
> term' value. end of discussion. Don't drop mark to market rules.

Mar 01 10:48 AM

[user344210:]

Life insurers hedge against declining markets by buying put options. If the markets continually decline, they take the profits from the put options and use those to pay off the guarantees they write into the contracts. One of the major issues facing the industry right now is that the ability to buy "cheap" put options is gone due to high volatility and VIX levels. The biggest sellers of put options when volatility was lower were hedge funds.

Of course, this all goes on behind the scenes, so I'm not surprised an agent wouldn't be aware of this, but that's how it works.


On Feb 28 12:27 PM TomL99 wrote:

> Everything else aside (especially AIG), I remain concerned about
> the viability of life insurers -- the ones who sell indexed annuities.
> It was less than two years ago that a financial advisor pitched a
> "can't lose" indexed annuity to me, that would guarantee a return
> of x% or the increase in the S&P 500, whichever was greater.
> I asked him what would happen if we had consecutive years of sharp
> declines in the S&P 500 -- how could the life insurer continue
> to fund this product? All I got was a blank stare, and then a reassurance
> that this company was very sound financially. And we all know what
> has happened in the last two years, and will continue to happen for
> the next year or two, with the decline in the stock market. Watch
> for the next shoe to drop in the insurance industry, as insurers
> have to face this issue head on.

Mar 01 10:52 AM

[ACE, AIG an...:]

Why ACE and AIG are NO DIFFERENT and REPRESENT THE SAME RISK PROFILE...

In an earlier communication, I indicated that the proximity of ACE's business model to that of AIG's makes them a similar risk and so one can expect the same result!

For the full year, AIG lost $99.3 billion, or $37.84 per share, compared with a proft of $6.2 billion, or $2.39 per share, a year earlier.

Total revenue fell 89.9 percent to $11.1 billion from $110.1 billion a year ago. AIG is a larger company than ACE and so the Value Destruction in both companies, though disimilar in size, was similar in proportion. ACE's profits fell by over 96% in the 4th quarter.

Shares of AIG rose 9 cents to 51 cents in premarket trading Monday. The stock, which traded at $49.50 a year ago, has lost nearly all of its value since the market meltdown began in September. ACE's stock is down almost 50% of its value to the mid $30's.

The true value of this stock is around $17.00 - it will get there soon. For those holding the stock, expect the decline to pace itself out - see the "daily decay model" explained earlier.

What holders of ACE stock need to realize is that they are headed in the same direction as AIG's -Few have any confidence left in the insurance industry as they are carrying the burden of risk associated with policy payments which are directly tied to the ability to pay - the default rates of policy payments (premiums) has tripled in the last 6 months and will continue to rise - on the reverse side, claims have quadrupled. Do the math!

Sentiment - SELL THIS STOCK!


Sentiment : Strong Sell

Mar 02 09:40 AM