Next In Line for Bailout? Life Insurance Companies 24 comments
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The insurance business is supposed to be simple and relatively stable. It's not difficult to sell insurance, collect premiums, hedge your risk elsewhere with re-insurers and then invest the remaining premiums conservatively.
So what the hell happened? AIG (AIG) allowed an unhedged fund to operate from within and a tiny 400 person division brought down a giant that employed 125,000. Hartford (HIG), Prudential (PRU), Lincoln National (LNC), MetLife (MET) and Genworth (GNW) are all suffering the same fate. All are facing ratings agency downgrades based on capital ratios that fall with the stock market.
The culprit in this mess are guaranteed variable annuity contracts. A relatively new phenomenom in the annuity business, guarantees on annuity returns are irresponsible and should never have been allowed to exist. I don't remember which insurance company first got the bright idea to offer a minimum guaranteed return for their investors, but once launched by 1, the other firms soon followed with similar guarantees.
Insurance regulators whistled by the graveyard and made no effort to stop or even slow down the proliferation of these contracts and the rest is history. Sure, there were no evident problems during the bull market of the past 13 years, but once markets began correcting it was simply a matter of time until these guarantees began to destroy capital cushions at all of the above firms.
Big deal, you say. Let these insurers go belly-up if they can't raise new capital. One small problem. Millions of Americans have their retirement savings in annuities and millions more have life insurance policies with the above firms. Our fragile system could not withstand a large run by policy holders to cash out their life insurance policies, as these companies operate like banks and only keep a small percentage of assets in liquid form.
So to prevent disaster, you will soon be asked to give half a trillion or so of borrowed money in order to save these life insurers all because of their goddamned guarantees on variable annuity returns. They won't ask for $500 billion all at once, because the sheeple might actually notice and complain. Instead we'll wake one morning soon to hear that Treasury has given $100 billion to the industry and that the problem is now solved.
Does the pattern sound familiar? It should. The government assault on taxpayers to rescue big business is always incremental. Drip, drip, drip until we drown.
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This article has 24 comments:
Insurance companies have been regulated the same for the last 70 to 80 years and over that time, only a handful of companies have ever failed, Confederation Life and Mutual Benefit, being the two more publicised failures. And in those cases, all claims were covered by the carriers who assumed the risks.
The reason that AIG is failing is not because of the insurance operations. It was the banking side that failed and the biggest trigger, which everyone fails to realize, was the marking to market assets for accounting purposes AND more importantly the hedge fund leveraging.
People, WAKE UP!!!!!!!!!!!!!!!!!!!!... Insurance companies are legally not allowed to do that. Regulators do not allow that. The only true investments that insurance companies really are investing in are Real Estate and Bonds. And in both cases, they are legally limited to how much of any one type, or any one security. Thus, the amount of potential write downs is a lot less.
As for guarantees on variable annuities, are you so blind to think that actuaries don't build their annuity products as if the will have to pay only on the guarantees? The companies have to reserve specifically for that and have been doing that for 150 years.
Will some insurance companies potentially fail, yes. Should we bail every large company out, no. That is the free market. I believe that the American ublic will be very shocked to see that a failure or two will not be the end of the world (where's woolworths, gimbels, etc...).
-Dying too soon
-Living too long
Insurance Companies have a natural hedge between Life Insurance and Annuities.
These companies can offer the guarantees for two major reasons
-Actuarial Science has determined many of you wil die prior to receiving the benefit of the guarantee
-It's not too good to be true...it's too good to be free. Customers pay a fee 40-125 BPS for the guarantee.
Just my thoughts!
Under state regulations shortfalls in insurer liquidity must be made up by the pool of insurers, meaning higher premiums. Generally the reserves of insurers are massive enough to withstand "black swan" events.
Unlike with mortgages insurance has a far better cash flow outlook. It's prices are lower and in many cases legislated. That means that if any industry requires some additional, inexpensive capital infusions via loans from the Fed, this is their recourse, and they have the ability to repay.
Concern, not panic.
Woo Hoo; Sell The Future For The Party !!!
Who Cares About Tomorrow !!!
(The world no longer resembles any form of reasoned rational)
Your understanding is incorrect. This was and remains a widespread problem. You are smart but still too much of an apologist for the status quo. AIG should be allowed to fail. These insurers should be allowed to fail and anyone who signed up for something as stupid as an guaranteed annuity contract should lose their money.
It as greed pure and simple, and I DO NOT wish to reward greed.
Let them fail and we'll deal with the aftermath.
1. The earlier product designs of Variable Annuities hardly charged anything for the guaranteed benefits.
2. Some of the earlier contracts permit "partial withdrawals" without reduced the death benefit proportionally. I refer you to Prudential stock brokerage firm's analyst report "Money For Nothing and Your Insurance For Free" In that report they mention HIG, LNC, and others having such flawed contracts.
3. Insurance companies were supposed to hedge, but some did not eg. Manulife - MFC until more recently
4. Many insurers hedged/targeted an assumed S&P 500 average way higher than previous levels... and they are still way off... for example at the earnings reports over th past 6 weeks insurers have said they expect / assumed a S&P500 index 900-950 on avaerage for 2009. They are waaaaaaay off on their assumption. Currently 2 months well below that number and its unlikely there will be several months above that level, so that the average assumption comes about. Why? The S&P 500 companies were expected (about 5-6 weeks ago) to earn $50-60 in 2009. P/E multiples are expected to be 10-15. Ok, let's take the maximum of those P = E x p/e ratio = 60 x 15 = 900. How will this AVERAGE of 900-950 come about? No way, they are waaaayy under-reserved.
5. Hedging costs. Volatility has increased making options more expensive. And the speed at which things are occuring makes hedging activity more frequent. The range (severity) is also increasing. I forget the exact numbers but in late 2008, AXA mentioned hedging costs of HC for a whole year (2007 i think) and in just one quarter of 2008 the hedging costs were 3x HC. Holy guacamole! Oh, yah, that's right, I forgot, all of this was foreseen when pricing these Variable Annuities contracts.
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On the point about insurers having a natural hedge because insurers cover death risk and risk of outliving the expectation. Well, wait a second:
1. Back to Variable Annuities. Look at the designs and how many contracts are perfectly designed? Also, some contracts may 'convert' or 'transform' where both risks may not be present.
2. On products other-than-Variable-An... let's say a whole life policy + an immediate annuity. Sounds good in theory, but what about practice: How many insurance companies have sold these two types of products to the same insured, in the proper proportion so as to be risk neutral? How many companies administratively know what risks they have on each insured? Wasn't there a concern in the industry for some time of "back-to-back" policies where the same insured buys life insurance from one insurer and buys the annuity from another insurer? Oh, and on those immediate annuities, how much underwriting is conducted... isn't it true a lot less underwriting is done on the annuity side?
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Moving onto Fixed Annuities, another area of concerns:
1. Minimum interest rate guarantee during the contract. Did anyone some years back predict interest rates at today's low levels? The investment spread (rate earned minus rate paid to policyholder taking into account guarantees say from 2% to 5%) has narrowed significantly eating into profits.
2. Policyholder activity during economic times. Usually, as interest rates rise policyholders are more prone to cancell their contracts to obtain higher rates on a new contact. Vice verse, as rates fall, they hold onto existing contracts because of the contract's higher rate. HOWEVER, many consumers are hurting financially in this economic climate and some contracts have a MVA (market-value adjustment) cost which is negative which means no cost for the policyholder to cancel the contract. One company identifying this activity as noticeable and affecting its financial results is FFG in their current earnings report.
Many more issues. I'll stop here for now.
Sure, it is difficult to estimate the amount needed for this/that problem, and amounts have been increased.
Obama indicated he wanted to clean up the economic mess. Letting a company go bankrupt is more straight-forward, and allows the private sector to determine how/what should re-emerge (instead of some complex administration of some pot of money collected from taxpayers).
On Mar 05 05:50 PM StockMarketSage.com wrote:
> Suntrust is still offerring annuities at 7% as of today, either they
> have a crystal ball or else there is going to be big trouble in that
> arena sooner rather than later..
SunTrust is not an insurance company and cannot offer annuities.
And I also believe he understates the problem of guaranteed variable annuities. Here are several links discussing the problem. As these articles show, this is not a mundane worry as Aristophanes suggests.
He disagreed and tried to minimize the worry. That is exactly how we got into the mess, by talking down the possibility of risk. I believe in telling the truth.
www.app.com/article/20...
www.iht.com/articles/a...
blog.atimes.net/?p=669
www.dailymarkets.com/s.../
The differences:
In the 1930's and for long before afterwards, these companies were mutuals, accountable to their policyholders, not to Wall Street.
Once they became stock holding companies, the speculative elemnet takes over - and guess what!
In particular, I'm interested in GNW, which has been driven below $1 in the last few days. Ratings were cut recently and the gov't claims no bailout (which I don't want to see in any case).
see the irony: the CDS "bets" i-bankers hold are being bailed out by the Public so that the REAL companies who produce GNP are forced/pushed into bankruptcy! Only in America!
For GNW, the short-sellers did it.
That's why each time GNW went down
to $1.00, we keep buying.