Friday, November 28, 2008

Guardian Life & Annuity Gets Rating Upgrade

In times where many life insurers are in danger of getting ratings downgrades, Guardian Life just got an upgrade from A.M. Best.

"A.M. Best Co. has upgraded the financial strength ratings (FSR) to A++ (Superior) from A+ (Superior) and the issuer credit ratings (ICR) to "aa+" from "aa" of The Guardian Life Insurance Company of America (Guardian) (New York, NY) and its core subsidiaries, The Guardian Insurance & Annuity Company, Inc. and Berkshire Life Insurance Company of America. A.M. "

This is good news for anyone needing more confidence before investing in annuity products.

While Guardian is not one of the biggest players in the variable annuity market space, they appear to be better capitalized than a number of their competitors. This could certainly help to drive sales if they chose to push annuities going forward as company ratings are at the forefront of investors minds these days.

Guardian currently offers two base Variable Annuity contracts and a number of guarantee riders including a Guaranteed Lifetime Withdrawal Benefit (GLWB) and a Guaranteed Minimum Income Benefit (GMIB).

Guardian can thank their diversified product offerings as well as a strong enterprise risk management platform which has allowed them to to reduce their risk and stay well capitalized during these difficult times.


Wednesday, November 26, 2008

New wave of Variable Annuity Products on the Horizon

In light of the current market environment, a number of the annuity providers are redesigning or repricing their guarantees. The bottom line is that due to increased market volatility, it is a lot more expense for insurers to offer market guarantees - up to 80% more expensive than a year ago.

That really only leaves the insurers with 3 choices:
1) take the hit on profits
2) pass on the higher costs to the consumer
3) redesign the products to bring the price down in the current market environment.

Up till now, insurers have been stuck with option number one by default - hence the historically low stock prices of market players. However, as it is vitially important that insurance companies stay profitable over the long run so they can make good on their insurance obligations, change is inevitably in order. That is why all the major players are looking to modify their guarantees. He's some early publicly available information:

AXA: Redesign GMIB. They used to offer two rollup rates - a 6% & 6.5% to increase the guarantee base. Now they are taking away the 6.5% option. In addition, they will be raising the rider cost by 15 basis points. Also, they will allow the GMIB policyholder an additional option to switch to a Guaranteed Lifetime Withdrawal Benefit at age 85.

ING: Retooling asset allocation restrictions. By reducing the amount of volatility in the policyholder's portfolio (i.e. percent equity holdings), they are able to reduce the cost of offering the guarantee.

Others that are looking into redesign but haven't publicly given details include John Hancock & the Hartford. And look for more to make announcements soon.

The va market is turning an a corner by bringing an end to the "arms race" of competing on richer and richer guarantees, which just wasn't viable over the long run. In the future we will continue to see several trends including:
1) less carriers promoting GMIBs
2) a reduction in rollup features
3) increase focus on ratchets

These redesigns are just a product of our economy. Just as when the price of filling up your gas tank increases as a response to higher oil prices, annuity guarantees are effected by the same market forces. In the case of va's, the raw ingredients are the the hedging instruments in the derivatives market. But fortunately in these hard times, the insurance companies can turn out their "fuel efficient" models much quicker.

However, those who are considering buying a variable annuity with a guaranteed rider can still get some good deals on the existing products if they act soon. Just be sure to look at the ratings on the insurance carrier before purchasing a va.


Friday, November 21, 2008

Big Annuity Players are Thinking Outside the Box for Capital Relief

Some of the big annuity players are so determined on getting government funding that they have taken on a new attitude: if the treasury won't change their eligibility criteria then we will change our company to meet the criteria.

As I mentioend in my previous blog, in order to qualify for the treasury's Troubled Asset Relief Program's (TARP) $700 billion, insurers would need to be recognized as a bank or a thrift that is regulated at the federal level. A number of annuity players already fell into one of those categories, such as Metlife, Prudential, John Hancock, and even AIG.

However a couple big names were not eligable, including Hartford, Lincoln and Genworth. Well they did some out of the box thinking in an attempt to get then "TARP elibable." He's my take on what went on in one of their executive meetings sometime last week:

CEO: I can't believe the treasury says we are not eligible for any of that $700 Billion of taxpayers money. This is going to kill us.

President: It's just not fair - they shouldn't be able to exclude us just because we are not a bank or a thrift. We need that money as bad as the next guy.

Exec Vice President: We'll we could buy a thrift (half joking)?

CEO: That's briliant! I think I know of a cheap one in Florida that we may be able to get for as low as $10 Million!

So, yeah, Hartford, Lincoln and Genworth suddenly entered into the thrift acquisition business for the sole purpsose of becoming TARP eligible. For companies in need of capital to go out and spend $10 Million to essentially buy a membership card for the troubled asset relief program club, it doesn't really seem like the most effecient use of their assets. We have the treasury's poorly thought out eligibility criteria - that excluded about have the industry - to thank for that.

So why did these three companies go out and spend millions to get on this list? Well insurers can apply for between 1% - 3% of their total risk based assets, up to a cap of $25 billion. Hartford said it would expect to receive $1.1 - $3.4 Billion. So While Lincoln and Genworth have not discussed what they believe they could get from thsi program, they did list assets of $173.3 Billion & $109.6 Billion from their Q3 earnings statment.

We wait with baited breath to see if these companies' thrift investments pay off and they are allowed to become elibible for the TARP. This would give these companies a much need boost to their capital.


Wednesday, November 19, 2008

Survival of the Fittest in the Variable Annuity Industry


The last few months haven't exactly been the best of times for the insurance industry. And this past week wasn't any better. A number of companies stocks took another sharp hit after Goldman's Chris Necaypor released his analysis of the industry earlier this week. On top of that, it seems like ratings cuts may be around the corner for a number of companies if they don't figure out how to raise more capital.

So what does this mean for the VA industry? Well the market for variable annuities certainly isn't going anywhere. There is still a huge mass of baby boomers set to retire over the coming years and the VA will continue to serve as an important component of their investment portfolio. However the landscape of companies competing in the market looks like it may get a face lift..

Darwin's survival of the fittest may indeed be applied to the VA industry. The top 15 players already make up nearly 90% of market sales. The smaller companies fighting for that last 10% may likely exit and sell their business and its possible that an acquisition or two may take place among the larger players ( Necaypor hinted at Metlife & other strong P&C companies being potential buyers). Further more, all signs indicate that the arm's race of richer and richer guarantees is coming to an end.

So what exactly happened this week?

Goldmans' Downgraded a number of insurance companies due to the following reasons:

  • Exposure to poor commercial real estate holdings

  • Decreased revenue from annuities and other asset based fees products

  • Anticipation of capital calls to avoid rating cuts

Ratings cuts... nothing a few Billion can't fix.

Remember the Troubled Asset Relief Program (TARP) - you know that $700 Billion the senate passed through. Initially Insurers not named AIG had taken the position that they didn't need or want any of that. Now it looks as if some insurers have had a change of heart. Lucky for for them, they may be able to claim a stake in it too... well some of them. According to the treasury (who appears to be making up the rules as they go along), some insurance companies may be able to get a slice if they can show they are affiliated to federally regulated banks or thrifts (sounds like the finance version of proving you have Native American blood to get Casino money). Unfortunately, other insurers who expressed interest in this money will be turned away. In their case they may have to resort to more traditional, and likely less desirable means of raising capital, such as:

  • Issuing more stock and hoping they find buyers

  • Borrow Funds via issuing bonds which would likely be at higher, less desirable rates do to the lowered ratings (see a downward spiral here)

  • Merger / Acquisition / Selling off a business line (as a last resort)

So we'll see in the coming weeks who's getting some of government (tax payers) funding and who wishes they were. There has also been some early indications that those who do not qualify for the money may have a few tricks up their sleeves to get on the list.

While Necaypor is not recommending ownership in most of these companies, it's not so bad for the policyholders who have purchased guarantees that are now “in the money” meaning the insurer is on the hook for paying out the difference between the initial deposit (or higher) and the current value in the underlying mutual fund type investments. Most insurers have hedging programs or reinsurance agreements set up to pay for these claims.

In Necaypor's analysis, one company did come out above the rest – Metlife. They seem to be well capitalized compared to their peer group. This seemed to be the rational for Necaypor to issue a “neutral” rating compared to a sell that most of the other companies. But there is still a good chance that Metlife does apply for federal money – not because they need it to maintain their rating, but rather to stock up funds so they can acquire some of the weaker annuity players. Should be an interesting few weeks in the insurance industry...