Posted by Larry Doyle on May 14th, 2013 8:39 AM |
A month ago Senator Max Baucus, a Democrat from Montana, projected that he envisioned the implementation of the President’s new health care program, aka Obamacare, as being “a train wreck.”
Well, in reviewing a report released yesterday by the US House of Representatives Committee on Energy and Commerce, we gain a greater appreciation for just how expensive this train wreck might be.
I hope readers are not already feeling ill at ease this morning because after reading this report I can assure you that you will get sick. Let’s navigate and look more deeply at The Looming Premium Rate Shock: >>>>>>> (more…)
Posted by Larry Doyle on July 29th, 2009 1:02 PM |
Despite the rise in the equity markets and supposed hints of stability in the economy, this is no time to get complacent about your investments. The transition we are experiencing in the economy and the markets will present real opportunities, but also real risks.
On the topic of risks, it is of paramount importance that all investors get full information from your brokers and financial planners across all your exposures. Do not allow those managing your money to indicate ‘the market feels OK here’ and leave it at that. Why? Significant underlying fundamental risks remain in the market. I am reminded of two of them this morning as I read the following about insurance companies and money market funds:
1. Experts Call for Fed Involvement in Insurance Industry — but to Different Degrees; InvestmentNews, July 29, 2009
Members of Congress are being urged to create — at a minimum — a new regulatory body within the federal government to focus on the insurance industry. “There is some systemic risk in insurance requiring a regulator,” said Travis Plunkett, legislative director of the Washington-based Consumer Federation of America, who was part of a panel of experts testifying today at a Senate Banking Committee hearing on modernizing insurance regulation.
“In order to fully understand and control systemic risk in this very complex industry, the federal government should take over solvency and prudential regulation of insurance as well.
This shift in regulatory oversight of the insurance industry would be a massive undertaking. Recall that all insurance companies are currently regulated at the state level; however, state insurance reserves to protect policyholders against defaults are woefully deficient.
The Wall Street Journal touches upon this as well, in writing Syntax Error? Life Insurers and Earnings:
Some life insurers used the recent market upturn to raise more than $10 billion in combined capital. Hartford Financial Services Group and Lincoln National, which report after the market closes Wednesday, accepted Treasury Department money. The injections have scaled back doomsday scenarios, as well as liquidity concerns that made a few insurers short-selling favorites.
At Hartford and Lincoln, analysts are watching closely to see if the government bailouts may be tainting the insurers in consumers’ eyes.
While certain banks were forced to take TARP money, for Hartford and Lincoln taking TARP became a necessity. If I had exposure to these institutions, I’d be monitoring them very closely. I’d do the same with all my insurance exposures.
2. Money Funds Are Ripe for ‘Radical Surgery’; Bloomberg News; Jane Bryant Quinn writes:
I’m among the last people standing who think that Paul Volcker is right about money-market mutual funds. They pose a systemic risk to the financial system and need a radical fix.
When a central banker of Volcker’s magnitude raises a concern of systemic risk, I am all ears. Virtually the entire money market industry is currently backstopped by Uncle Sam. How many of these money funds may ‘break the buck‘ without some form of assistance? Bryant asserts:
In most cases, money-fund sponsors have come to the rescue of their funds if any question arose about the $1 value of their shares. Peter Crane, president and founder of Crane Data LLC in Westboro, Massachusetts, says as many as one-third of the funds will have needed support by the time this global financial squeeze abates.
But you can’t be sure that sponsors will always be willing or able to bail out their shareholders, says Jack Winters of Hingham, Massachusetts, an expert who worked in the industry from 1976 to 2008 and commented on the SEC proposals.
“Dealers supported auction-rate securities for 25 years until their financial situation precluded it,” Winters says.
We know all too well how the ARS debacle unfolded.
No time for complacency!!
Posted by Larry Doyle on May 15th, 2009 8:29 AM |
The fact that a handful of insurance companies are eligible to receive government funding via the TARP is a much bigger event than the benign media reports would indicate. In my opinion, the news reported by Bloomberg, Prudential Said To Be Among Insurers Cleared For TARP, is a clear sign of a much larger storm on the horizon. Why? Let’s get after it.
Not every insurance company has the same business profile. Some are more aggressive in underwriting. Some are more aggressive in their investment portfolio. Some are more aggressive in their product offerings. That said, they’re all members of the same family and if one has the flu, you can rest assured many others are also sick.
On March 12th, in Is My Insurance Insured?, I wrote:
While the government has already taken an 80% stake in AIG, how do the state insurance commissioners deal with entities like Hartford, Met Life, and others with outsized risks and resulting declining capital cushions? Let’s go visit Uncle Sam!! That’s right, if you thought “bailout nation” was already swamped by banks, automotive companies, and Freddie/Fannie, the fun continues: The Next Big Bailout Decision: Insurers.
Fast forward to May 15th and here we are.
Why do the state insurance commissioners have to go to Washington? What about the reserves at the state level? Well, are you sitting down? Those reserves nationwide total only $8 billion.
Can insurers write enough premiums quickly enough to generate sufficient capital to address the losses? That is the $64 billion question. Actually, it will likely be much larger than that. Why?
As consumers are strapped for liquidity and getting credit lines squeezed – if not totally cut by their banks – they will look to tap the cash value of their insurance at an ever greater rate. If consumers were to triple the rate at which they have tapped these lines, the insurance industry would experience a capital drain of approximately $500 billion. Insurance companies will be forced to raise capital via debt or equity offerings, asset sales, or drawdowns of cash and liquidity reserves. The industry has approximately $450-$500 billion in cash and liquidity reserves. “Houston, we’ve got a problem.”
Haven’t insurance companies benefitted from the relaxation of the mark-to-market? No, they do not utilize that form of accounting. Insurance companies typically carry assets at cost or model valuations. If and when the assets suffer a prescribed level of defaults, the losses must then be recognized via a write down in the asset’s value. As losses via defaults and foreclosures across their assets continue to increase, well, that’s why we just saw these insurers “roll out the TARP.”
Can’t the insurance companies sell their assets to stem the losses? Not easily. Why? Insurance companies have traditionally reached for yield (higher rates of return) by purchasing higher risk assets or writing higher risk insurance. In doing so, the industry has sacrificed the liquidity associated with lower risk assets/products. What are these assets and where do the problems lie?
1. Annuities: this product was aggressively underwritten by insurance companies after the meltdown of the NASDAQ in 2001-2002. A principal protection component was particularly attractive to many investors. That component provided investors downside protection but is now a large source of pain for the industry. In short, investors won, insurance companies lost as the market plummeted.
2. Commercial Real Estate: aside from the banks, insurance companies are the largest underwriters and holders of CRE. Insurance companies not only originated billions in CRE but they were typically the biggest buyers of the subordinate classes of CMBS (commercial mortgage backed securities) deals underwritten by Wall Street banks.
3. Defaults: with default rates on loans (mortgages, corporate, commercial real estate) expected to at least double, likely triple, and in the most credit sensitive sectors potentially quintuple, these losses will quickly burn through established reserves.
As Bloomberg reports:
“If you had some of these companies, the bigger ones like Hartford, go into a spiral, that would just cause another round of panic,” said Robert Haines, a New York-based analyst at CreditSights Inc. “I don’t like the idea of the government getting involved with these companies. You’re making to an extent a deal with the devil, but your options are really limited at this point.”
The problems within the insurance industry are not contained to the firms (Hartford Financial, Prudential, Principal, Allstate, Ameriprise, and Lincoln) that received approval for TARP funds. These institutions are eligible for government funds via TARP because they have bank subsidiaries or have purchased a bank or S&L. What about the insurance companies not in that position? Stay tuned.
Sense on Cents will be monitoring this situation very closely.
For a compilation of posts by Sense on Cents on this topic:
January 12th: Got Insurance? 529 Plans? Financial Aid? Read On…
-an interview with Sean D’Arcy, a longstanding professional within the insurance industry and financial planning space. Sean laid out all the problems.
March 12th: Is My Insurance Insured?
-a review of the fact that policyholders have credit exposure to their insurance carriers.
March 30th: What Is Lincoln Thinkin’?
-a review of Lincoln Financial’s purchase of a small savings and loan in Indiana in order to gain access to government funding.
April 6th: Insurance Companies’ Ignorance Is Definitely Not Bliss!!
-a survey of insurance brokers in which the brokers maintain the insurance companies did not appreciate and understand the degrees of risk embedded in insurance products sold.
April 7th: Uncle Sam To Throw Lifeline To Life Insurers
-a post pointing toward the move made yesterday.
Posted by Larry Doyle on April 13th, 2009 1:49 PM |
Who can ever forget the Seinfeld episode featuring the Soup Nazi? Well, in that same vein, the insurance company Genworth Financial was just summarily thrown out of the Treasury “line” to receive TARP funds. The WSJ reports, Genworth Financial Shares Slump on TARP Ineligibility:
Shares of Genworth Financial Inc. fell as much as 31% Monday as investors responded to the insurer’s late-Thursday announcement that it is ineligible to participate in the Treasury’s Capital Purchase Plan because it missed a deadline that Treasury won’t extend.
The mere fact that Genworth, Hartford Financial, Protective Life, or any other insurer are requesting government funds is another version of the “putting perfume on a pig” play we saw with the FASB relaxation of the mark-to-market. Why is that?
The TARP (Troubled Asset Recovery Program) was designed by Congress for banks needing increased capital. If investment banks can become bank holding companies, why not insurance companies as well? Perhaps, the next thing you know, we’ll have plumbers designating themselves as banks. How about construction companies? Maybe a bakery or two? Anybody for a newly defined U.S. Financial Blogging Bank? Where do I sign? We could all use some “soup.” (more…)
Posted by Larry Doyle on April 7th, 2009 9:06 PM |
No surprise here. Starting with my interview of Sean D’Arcy in early January, I have tried to highlight the expected capital shortfalls in the insurance industry.
Obviously not every life insurance company has the same issues but the models are largely similar.
Don’t expect the number of insurers looking to jump into this lifeboat to be only a few. State guaranteed funds for insurance companies total a whopping $8 billion.
Additionally, if consumers look to tap the cash value in their policies, the insurance industry will potentially need to raise more than a few hundred billion dollars. That capital can be generated by asset sales or “hello, Uncle Sam!”
Posted by Larry Doyle on April 6th, 2009 5:20 AM |
I remain very concerned about potential liquidity and capital shortfalls within the insurance industry. The investment portfolios of insurance companies are chock full of the following:
1. commercial real estate loans: defaults expected to triple.
2. corporate loans and securities: defaults expected to triple
3. sub-prime and Alt-A (between prime and sub-prime) residential mortgages: defaults expected to quadruple.
4. prime mortgages: defaults expected to triple
I wrote What is Lincoln Thinkin’ to address the pressures that Lincoln Financial was facing. Those pressures are certainly not abating; in fact, the WSJ writes how Lincoln Faces Rising Stress As Its Debt Comes Due.
Over and above the pressures specific to Lincoln, the industry as a whole is facing strains due to the massive amount of annuities written by insurance companies. These annuities were written to provide policyholders a guaranteed fixed payout. With the significant selloff in the equity and bond markets, the insurance industry is facing an enormous capital shortfall on these annuities. (more…)
Posted by Larry Doyle on March 30th, 2009 3:56 PM |
Lincoln Financial Group is not exactly a small or even medium sized insurance company. LNC has a current market capitalization of approximately $2.5 billion. The stock is down almost 40% on the day, trading at approximately $6.50. The 52 week high for Lincoln was $59.99. Clearly, Lincoln has a whole host of issues.
What is Lincoln thinkin’? What should a company do in circumstances like this? Well, how do they put themselves in a position of getting access to government bailout money currently allocated to banks?
Perhaps Lincoln could become a bank. But how does an insurance company become a bank? Well, how about they just go buy one. So that is what Lincoln did. The WSJ reports:
Lincoln National was believed to have qualified for TLGP (Temporary Liquidity Guarantee Program) and other government programs after it acquired Newton County Loan & Savings in Indiana and converted into a savings and loan in November. However, in the company’s filing with the Securities and Exchange Commission, it said it does not believe it qualifies under the current provisions of the TGLP and thus voluntarily withdrew its application to participate.
Posted by Larry Doyle on March 24th, 2009 8:47 AM |
I have written at length about the problems within the banking, insurance, hedge fund, and consumer finance industries over the last 6 months. While the bulk of the media focus has been on the banking industry – and primarily the large money center banks – the erosion in asset values at these other financial companies has been accelerating.
This past Sunday evening on my weekly radio show, NQR’s Sense on Cents with Larry Doyle, I spoke extensively about the massive financial shortfall within the insurance industry. In addition, relatively early on I warned that the hedge fund industry had likely been severely mismarking many investments. From a piece I wrote on November 12, 2008:
Give it time, because hedge funds do not have to report to anybody as to what their positions are and where they have them marked. There is no doubt they have positions that are grossly mismarked and have many positions that are totally illiquid. For many investors in these funds, these are truly “roach motels.” Hedge funds will sell what is most liquid when they can to meet redemption requests. We should expect a significant number of hedge fund liquidations, consolidations, and out and out disasters.
The same can be said for a number of private equity shops. Consumer finance companies with large holdings of a variety of consumer assets are fighting for their lives as delinquencies and defaults on these assets ratchet higher. (more…)
Posted by Larry Doyle on March 23rd, 2009 6:05 AM |
The movie Jaws struck fear into the souls of beachgoers in the mid-70s. If our current economy were only a scary movie. A classic scene in Jaws occurred when the salty mariner Quint eyed the shark and informed his sidekicks, “we need a bigger boat.”
In similar fashion, the size of the losses embedded in our banking, insurance, automotive, and states and municipalities will similarly require “a bigger boat!!”
Capital needs in the banking industry are projected from at least $500 billion to $1.5 trillion. Bloomberg reports former Fed chair Greenspan Says Banks Need $750 Billion More Capital. Nouriel Roubini puts the needs at upwards of $1.5 trillion. (more…)
Posted by Larry Doyle on March 19th, 2009 4:20 PM |
The kangaroo court on Capitol Hill just passed a bill to tax bonus payments at a 90% rate for employees (with family incomes in excess of $250,000) of AIG and other firms that received $5 billion or more in government bailouts. In my opinion, this piece of legislation is a poorly constructed means of recapturing government funds.
I have previously stated that firms which were truly bailed out by the government should be subject to strict government compensation controls. A number of firms – such as Northern Trust, JP Morgan, Wells Fargo, and Goldman Sachs – were compelled to take government funds. If employees of these firms are subject to this tax, it will be a travesty and injustice of unprecedented proportions. I believe that Congress is unknowingly escalating class warfare amidst a facade and charade of protecting the public. I believe we will see public outrage from employees at these firms (JP Morgan, Northern Trust, Goldman, Wells Fargo) that can only be rivaled by our forefathers back in the 1770s. This tax is another means of promoting the income redistribution upon which Obama ran his campaign. Taxation without representation is tyranny!!! (more…)