March 2009 Archives
Tough Love
Tough Love for Insurance Companies
by Jim CramerFebruary is supposed to be a romantic month, but for the big insurance companies, it was particularly harsh. The ratings agency Standard & Poor’s downgraded 10—count ’em—10 insurance companies last week. That means that the people who study such things are worried about how much cash your annuity insurer has on hand to pay you.
Now, I’m no alarmist and I think you’ll be fine, if you’re one of those annuity holders. But it pays to be prudent, so knowing your insurer’s financial picture is a smart move.
Hey, after all, Cramer Nation is all about smart financial moves.
So what’s with the down grades? Here’s what we know:
On February 26, Standard & Poor’s slashed its ratings on a slew of U.S. life insurance companies, inferring that the insurers had taken a beating in the financial markets and were hemorrhaging cash at an alarming rate. In insurance speak, S & P lowered its counterparty credit and financial strength ratings on 10 groups of U.S. life insurers, and its counterparty credit ratings on seven U.S. life insurance holding companies.
“The pressures within the life sector have been building,” S&P said in a statement. “Given the disarray in the credit and capital markets, most insurers’ financial flexibility has decreased in the past six months.”
Like I said, even S&P didn’t want to alarm the public and scare consumers. The ratings agent took pains not to paint too negative a picture, saying, "Although today's rating actions reflect our opinion of a general decline in the overall credit worthiness of the U.S. life insurance sector, we continue to believe the credit fundamentals of the life insurance industry are strong."
Here’s a list of the insurance companies downgraded by S& P:
- Conseco Inc. (Stock Quote: CNO)
- Genworth Financial Inc. (Stock Quote: GNW)
- MetLife Inc. (Stock Quote: MET)
- Prudential (Stock Quote: PRU)
- Hartford Financial Services Group (Stock Quote: HIG)
- Lincoln National (Stock Quote: LNC)
- Protective Life Corp. (Stock Quote: PL)
- Midland National Life Insurance
- Pacific Life Corp
- Security Mutual Life Insurance
Which companies represent the most risk to insurance customers?
MetLife is on the list. S&P cut the insurer’s rating to “A-minus,” the seventh-highest investment grade, according to S&P. Hartford might be another, as S&P cut its rating to “BBB-plus”, S&P’s third-lowest investment grade. Genworth saw its rating slashed by two notches to “BBB”, S&P’s second-lowest investment grade. Prudential didn’t really fare any better, it merited an “A" rating, S&P’s sixth-highest investment grade.
As I said, I’m confident that these companies have enough cash to pay off on their annuities, but not if it costs them more to borrow cash. So life is getting harder for the life insurance industry. Still, I am taking no prisoners. A few years ago, my original life insurance company merged with one of the companies on the S&P list, Genworth. I was not happy about it, but insurance companies have their own rules and I was basically sent a bill by Genworth. I was horrified to see them downgraded and even though the CEO personally assured me not to worry, I recently took out a second policy for half the money of the first one with an insurance outfit I vetted personally (Minnesota Life). I did that because I didn't want my kids thinking, "What the heck was Dad doing? He was supposed to be so smart!" So, should you do the same thing if you have a policy with an insurer on this list? Better to be safe than sorry. I still pay my Genworth bill though, primarily because I believe the government won't let them default.
A disturbing pattern. The life industry has been slashing dividends, laying off tens of thousands of staffers and lining up in Washington for some big-time bailout relief. The lousy economy has also done a number on insurance company assets, as the quality of corporate debt and mortgage-backed bonds has been reduced dramatically.
That goes beyond just the “Tough Luck 10” that S&P cited. For example, AIG’s problems are well documented (Stock Quote: AIG). On Monday, AIG announced a staggering $61.7 billion loss that prompted the insurance giant to ask for a $30 billion cash infusion from Uncle Sam. Traders are starting to call AIG a “black hole” and I can see why. Basically, the U.S. government, via the American taxpayer, pretty much owns AIG in the form of its interest and dividend liabilities and that’s not a pretty picture.
The worst part? Somehow I don’t think that we’ve seen the last of an AIG bailout. They’ll be back again, looking for more TARP money, unless AIG bondholders agree to take a big financial hit. Up to now, though, AIG bondholders haven’t had to because we’ve been tapped again and again to bail them out. So why would the bondholders change their tune now?
Back to the life insurance downgrades.
If you think you want to get your money out of an annuity, your best move is to get on the phone with your provider and hash it out. Historically, it hasn’t been easy for annuity holders to get good deals on flexible cash out options once they’re “locked in.” Often you’re staring big cash out fees in the face if you decide to liquidate. There is some good news here, though. A decent secondary market has sprung up for liquidating annuity payments. Ask your provider about options in the secondary market, and see if any work for you.
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A Letter from NACO
March 12, 2009
To Our Valued North American Distributors:
North American has strongly committed to a long-term focus that delivers value for you and your clients. Our financial strength as a privately held Company has clearly provided us with an advantage in the marketplace which we intend to preserve. Our focus has been and will continue to be in providing competitive products, fair compensation and quality service.
North American's investment portfolios have performed better than most of our competitors in the current environment. We intend to manage our investments for the long-term and maintain our long-term financial strength.
We are experiencing record levels of new annuity applications and are very grateful for your trust in our Company. The high amount of annuity applications is challenging our ability to provide quality service and threatens our quality long-term relationships that we have worked very hard to build.
We are making the following changes effective Monday, March 16, 2009:
Minimum premiums on all fixed annuity applications will be raised to $20,000 for Qualified and Non-Qualified business. (We will continue to accept 403(b) salary reduction business at our current minimum premiums.)
Maximum fixed annuity premiums will be lowered to $1 Million, per owner/annuitant. We will temporarily suspend new fixed annuity agent appointments. PLEASE NOTE: This does not effect North American Life Insurance Contracting. Appointment of agents to sell life insurance policies is encouraged.
As a field distributor, we have truly appreciated your efforts to bring us new agents over the years. Unfortunately, we must temporarily suspend contracting and processing new agents so we can properly service and support the many thousands of agents already contracted and producing.
These changes, while difficult, are necessary in order to continue to provide our long term values in products and services to our distribution partners. We continue to appreciate you and your business!
Respectfully,
Esfand Dinshaw
President, Annuities, North American
A.M. Best
A.M. Best Downgrades Ratings of AVIVA plc and Its Rated Subsidiaries; Rating Outlook Is Stable
Oldwick, N.J., March 12, 2009
A.M. Best Co. has downgraded the issuer credit rating (ICR) to "a-" from "a" of the non-operating holding company, AVIVA plc (AVIVA) (United Kingdom), and the financial strength rating (FSR) to A (Excellent) from A+ (Superior) and the ICRs to "a+" from "aa-" of its rated subsidiaries. A.M. Best also has downgraded the debt securities issued by AVIVA. The outlook for all ratings is stable. (See below for a detailed listing of the companies and ratings.)
The rating action follows the company's negative bottom line financial performance and a reduction in risk-based capitalisation, resulting from investment losses of GBP 2 billion that the company reported in its 2008 results. The losses were incurred following the continuing equity market turmoil and widening credit spreads on its investment portfolio.
A.M. Best considers that, whilst part of the unrealised investment losses emanate from corporate bonds that the company expects to hold to maturity, the level of actual defaults (GBP 140 million [0.2% of the portfolio]) and impairments (GBP 260 million) incurred is significant. At the same time, the company increased provisions for further default losses on the assets backing its UK annuity portfolio by GBP 550 million, taking the total default provision for this business to GBP 1.1 billion, which represents 8% of the value of the portfolio.
Whilst the decision to strengthen the default provision and the current provision itself is in line with that of AVIVA's peers, A.M. Best is concerned about the level of shareholders' asset risk associated with AVIVA's global corporate bond portfolio backing its life and GI businesses (amounting to GBP 26 billion), where the investment mix includes 30% of assets rated BBB or lower.
In A.M. Best's opinion, despite the company's low historical default experience on its GBP 12 billion UK commercial mortgage portfolio, future losses are more likely. This follows the deterioration of the portfolio's loan to value ratio from 81% in June 2008 to 103% in December 2008, though interest service cover remains strong at 1.3 times.
In line with a number of life insurers in the United Kingdom, AVIVA's risk-based capitalisation benefits significantly from soft elements such as value in force (VIF). Consequently, following significant reductions seen in the VIF in 2008, which in part reflects AVIVA's adoption of market consistent embedded value (MCEV) reporting, and also factoring in the effect of investment losses on the level of AVIVA's unallocated divisible surplus, the company's overall capitalization decreased. A.M. Best also believes that AVIVA's decision to maintain its dividend payments in 2008 puts further strain on its ability for a speedy return to its historical capital strength.
The ratings also take into account AVIVA's diversified business profile, which is underpinned by its strong market position in the UK and European life insurance market, a growing presence in the United States, as well as its strong multinational general insurance business. AVIVA announced increased operating profits and new business sales growth of 11% to GBP 36 billion in 2008, partially attributed to currency movements, and that its market share in the UK life insurance market increased to 11.3% (10.5% in 2007). The company reported that from 2009, it is increasing its focus on balancing sales volumes against returns.
The FSR has been downgraded to A (Excellent) from A+ (Superior) and the ICRs to "a+" from "aa-" for the following member companies and key European entities of AVIVA plc:
- AVIVA International Insurance Limited
- Norwich Union Insurance Limited
- Commercial Union Life Assurance Company Limited
- CGNU Life Assurance Limited
- Norwich Union Life and Pensions Ltd
- Norwich Union Annuity Limited
- Delta Lloyd N.V.
- AVIVA Vida y Pensiones, S.A de Seguros y Reaseguros
- AVIVA Italia Holding S.p.A.
- AVIVA Assurances
- AVIVA Courtage
- AVIVA Vie
- Societe d'Epargne Viagere
- Eurofil
The rating has been downgraded to "a-" from "a" for the following senior debt issue:
- AVIVA plc— -- GBP 200 million 9.5% guaranteed bonds due 2016
The rating has been downgraded to "bbb+" from "a-" for the following subordinated debt issues: AVIVA plc—
- GBP 800 million 6.125% perpetual subordinated notes
- EUR 800 million 5.75% step up subordinated notes, due 2021
- GBP 700 million 6.125% callable fixed rate reset subordinated bonds, due 2036
- EUR 650 million 5.25% callable subordinated notes, due 2023
- EUR 500 million 5.7% perpetual notes
- USD 300 million floating rate subordinated notes, due 2017
- GBP 400 million 6.875% callable fixed rate subordinated notes, due 2038
- EUR 500 million 6.875% callable fixed rate subordinated notes, due 2018
- GBP 200 million 6.875% callable fixed rate subordinated notes, due 2038
The rating has been downgraded to "bbb" from "bbb+" for the following direct capital instrument issues:
- AVIVA plc—GBP 500 million 5.9021% direct capital instruments redeemable 2020 or thereafter
- EUR 700 million 4.7291% direct capital instruments redeemable 2014 or thereafter
The rating has been downgraded to "bbb+" from "a-" for the following indicative ratings on shelf securities:
- AVIVA plc— --senior subordinated notes
The rating has been downgraded to "bbb" from "bbb+" for the following indicative ratings on shelf securities:
- AVIVA plc— --junior subordinated notes
The FSR has been downgraded to A (Excellent) from A+ (Superior) and the ICRs to "a+" from "aa-" for the following life/health subsidiaries of Aviva USA Corporation:
- Aviva Life and Annuity Company
- American Investors Life Insurance Company, Inc./li>
- Aviva Life and Annuity Company of New York/li>
The ICR has been downgraded to "bbb+" from "a-" for Aviva USA Corporation.
The following debt ratings have been downgraded:
- Aviva USA Corporation— -- to "bbb+" from "a-" on $143.75 million 6.583% senior unsecured notes, due 2011 ($20 million outstanding issued by the former AmerUs Group Co.)
- Indianapolis Life Insurance Company— -- to "a-" from "a" on $25 million 8.66% surplus notes, due 2011
The principal methodologies used in determining these ratings, including any additional methodologies and factors, which may have been considered, can be found at Best's Credit Rating Methodology.
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers.
Hit the Mark with NACOLAH's Triple Pay!
Hit the mark with North American's new $100 Triple Pay!
Marketer Incentive
For each new agent contracted in 2009 under a participating Partner MGA, North American will pay a $100 cash bonus for each of the first three submitted and paid cases.
- First case must be submitted within 45 days of contract approval and paid in 2009.
- Second and third cases must be submitted and paid in 2009.
- Up to $300 in total paid to MGA marketers for each qualifying agent
For complete details, contact Joe Zuccolotto at
(916) 939-3765 x105
S&P Drops Ratings
S&P Drops Ratings on 10 Life Insurers
March 2, 2009
Standard & Poor’s Ratings Services has lowered its counterparty credit and financial strength ratings on 10 U.S. life insurance groups because of stressed assets.
Learn more
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