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Next In Line for Bailout? Life Insurance Companies

Oh, on bailouts... they are like a dangling this pacifier or carrot in front of the citizen-taxpayers/inve... They give false hope and prolong the inevitable. The market hates uncertainty.

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).

Next In Line for Bailout? Life Insurance Companies

Some important items have been overlooked on Variable Annuities:

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.