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Posts Tagged ‘Insurance Industry’

Heavy Losses Raining on Insurance, Roll Out The TARP

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.

LD

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.

Uncle Sam To Throw Lifeline to Life Insurers

Posted by Larry Doyle on April 7th, 2009 9:06 PM |

life-preserverNo 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!”

The WSJ reports: Treasury Plans To Extend TARP to Life Insurers. (more…)

Treasury Seeks Unprecedented Power

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…)

AIG “Robs the Bank”

Posted by Larry Doyle on March 15th, 2009 9:07 AM |

When an entity has an 80% equity stake in a company, one may think that nothing of substance could happen there without that majority shareholder’s consent. Well, how is it that the black hole known as AIG to Pay $450 Million in Bonuses

We may see some arm waving and loud pronouncements from Congress about investigations, but the question still begs as to how this happened. The government took this majority stake in AIG last September. Are we to believe government representatives were both unaware of potential contractual payments and that they did not approve them? How could the government approve payments within a division that brought the global markets to its knees? 

Perhaps we should revisit the theme of my piece, How Wall Street Bought Washington.  Embedded in that piece, we can see the insurance industry lavished $220 million in campaign contributions and $1.1 billion in lobbying dollars on Washington over the last decade. AIG was one of the primary sources of that money.

Follow the money!!

LD






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