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From
February 2009 Resource
Uncharted Waters
This year, rising investment
losses, falling equity markets and weak economic conditions will pressure the
profitability, financial flexibility and capital adequacy of life insurers.
Here’s a summary of the financial meltdown to date.
By
Jennifer Rankin
Rising
unemployment. Upside down mortgages. Falling stock prices.
If you’re a middle-aged
industry professional, you’ve been here before—five times to be exact.
Contractions (recessions) start at the peak of a business cycle and end at the
trough, according to the National Bureau of Economic Research, which pegs the
dates as November 1973 to March 1975, January 1980 to July 1980, July 1981 to
November 1982, July 1990 to March 1991, and March 2001 to November 2001.
While
we’ve navigated choppy financial waters before, this journey may prove to be
our roughest yet. For America, the news—and the numbers—are grim:
-
101
blue chip U.S. stocks selling for less than US$ 10 per share, according to
Standard & Poor’s
-
Five
straight months of falling retail sales, according to the Commerce
Department
-
Nine
billion fewer miles driven in October alone, according to CNNMoney
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Two
million jobs lost in 2008 (533,000 of which occurred in November alone), the
most in 34 years, according to Reuters
-
8.4 percent drop in home values
in 2008, according to Zillow.com
-
5.9
percent of prime mortgage loans and 33 percent of subprime mortgage loans
are at least a month overdue or in the foreclosure process, according to the
Mortgage Bankers Association
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11.7
million homeowners (roughly one in six) owe more on their mortgage balances
than their homes are worth, according to Moody’s
What happened and how
will the current economic crisis affect the insurance industry?
The first sign of trouble
emerged in June 2007, when two Bear Stearns hedge funds collapsed. As the year
unfolded, more banks began to discover they had significant exposure to
securities tainted with what came to be called toxic mortgages. In March 2008,
the Federal Reserve staved off a Bear Stearns bankruptcy by assuming US$30
billion in liabilities and engineering Bear’s sale to JPMorgan Chase. In April
2008, mounting subprime losses caused AIG to report a record US$ 13 billion in
losses over the fourth quarter of 2007 and first quarter of 2008. In May 2008,
the Fed increased the size of its loans to banks and allowed them to put up less
secure collateral. In July 2008, federal regulators seized control of IndyMac
Bank, the ninth-largest U.S. mortgage lender, after a massive run on deposits
and mounting loan defaults. In August 2008, government officials became
concerned as the stock prices of Fannie Mae and Freddie Mac,
government-sponsored entities (GSEs) that were linchpins of the housing market,
dropped sharply; on September 7, the Treasury seized control of both and
injected US$ 100 billion into each.
Then,
as CNBC anchor Maria Bartiromo put it in her BusinessWeek
column, “Wall Street as we knew it died on Friday, September 12” when top
federal officials met with top financial executives and Lehman Brothers
representatives to try to engineer a bailout of Lehman. They failed.
Perfect
Storm
What
happened next was brutal and brutally fast.
On September 14, Lehman
Brothers filed for bankruptcy protection and rival Merrill Lynch sold itself to
Bank of America for US$ 50 billion to avoid a similar fate.
On September 15, AIG
reached a deal with New York State officials to tap US$20 billion of its own
capital.
On September 16, the US$
62 billion Reserve Primary Fund, the world’s first money market fund, reported
it had lost money on debt instruments issued by Lehman. Such losses are
unprecedented in money market funds, which are supposed to be as safe as hard
cash. On the same day, Britain’s Barclay’s agreed to buy parts of Lehman.
On September 19, Treasury
Secretary Paulson asked the U.S. government to spend hundreds of billions of
collars to take toxic mortgage assets off the books of financial companies to
restore financial stability.
On September 20,
President Bush asked Congress for US$ 700 billion to bail out firms struggling
with bad mortgage debt.
On September 21, Goldman
Sachs and Morgan Stanley were given the green light to become bank holding
companies regulated by the Fed.
On September 22, Morgan
Stanley agreed to sell a US$ 8.5 billion equity stake in itself to top Japanese
bank Mitsubishi.
On
September 23, The Federal Reserve agreed to lend AIG US$ 85 billion in exchange
for a 79.9 percent stake in the company.
On September 26, the U.S.
government closed Washington Mutual in the largest failure of a U.S. bank and
sold its banking assets to JPMorgan Chase.
On September 29, Wachovia
agreed to sell most of its assets to Citigroup.
The
C-suite is taking a beating. Executives are losing their bonuses, agreeing to
work for a dollar a year and getting humiliated by the press. While the actions
of a few have unfairly jeopardized the reputations of many, there are rising
concerns about the management of public companies and a level of borrowing and
risk-taking many hoped had ended with the implosion of Enron in 2001. And while
the public and press slam the short-term focus and self-dealing of executives,
it’s important to remember that shareholders and homeowners weren’t
complaining when the value of their portfolios and homes was sky high.
Nonetheless, something big is out of whack.
Today’s
credit crisis is not the first time Main Street has collided with Wall Street.
Nor is it the first financial crisis to draw a major Congressional response. In
fact, the Crash of 1929 and subsequent Great Depression compelled Congress to
pass the Securities Act of 1933, followed by the far more sweeping Securities
Exchange Act of 1934.
The
Sarbanes-Oxley Act, which was signed into law on July 30, 2002, was the next
piece of major legislation passed to stop financial shenanigans, which began to
surface in late 2001 with the Enron scandal. By the middle of 2002, many others
had surfaced, among them Adelphia, Global Crossing, ImClone, Tyco, Waste
Management and WorldCom. The stock market plummeted and Congress rushed to pass
Sarbox, which is also known as the Public Company Accounting Reform and Investor
Protection Act of 2002, before its August recess (and the November elections).
At
the heart of these scandals was the manipulation (overstatement) of net profits
by fraudulent accounting practices in order to meet (or exceed) earnings targets
and the lack of proper accounting oversight by outside auditors. Corporate
officers exacerbated the situation by claiming no knowledge of the financial
corruption of their subordinates, by receiving big bonuses for poor performance,
and by executing insider trades during pension blackout periods. Some spent vast
amounts of company money on themselves without board knowledge. Who can forget
the millions Tyco CEO Dennis Kozlowski spent on homes and furnishings, including
the infamous $15,000 umbrella stand? Enron topped them all, creating a parallel
market place in which it traded with itself, unbeknownst to stockholders or
regulators.
Another
scandal—after-hours trading of mutual funds—hurt the average investor much
more directly, because even those with no investment portfolios have traditional
or 401(k) pension plans. Several funds management executives lost their jobs as
a result.
The
scandals cost investors billions of dollars when the share prices of the
affected companies collapsed and shook public confidence in the country’s
securities markets. Why hadn’t the regulators caught on? Who was monitoring
the potential conflicts of interest that could arise when the research
department of an investment bank published favorable analyst reports on the
stocks of companies doing business with the investment side of the bank? What
were the boards of directors thinking?
When
President Bush signed Sarbox into law, he said it included “the most
far-reaching reforms of American business practices since the time of Franklin
D. Roosevelt.” Sarbox:
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Mandates
new or enhanced standards for all U.S. public company boards, management and
public accounting firms
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Addresses
a wide variety of issues, among them auditor independence, corporate
governance, internal control assessment and transparent financial disclosure
-
Requires
the Securities and Exchange Commission (SEC) to implement rulings on
requirements to comply with the new law
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Establishes
a new quasi-public agency, the Public Company Accounting Oversight Board (PCAOB)
that’s responsible for overseeing, regulating, inspecting and disciplining
accounting firms in their roles as auditors of public companies.
-
Requires
CEOs and CFOs of public companies to personally certify the accuracy of
various financial reports and imposes stiff criminal penalties for false
certifications.
If
you’ve been tracking the financial blogs hosted by the New
York Times and other major media
players, you know that a frequently asked question is, “Wasn’t
Sarbanes-Oxley supposed to prevent another financial meltdown?” Well, yes and
no.
This
time, the risky behaviors and players are different. This time, subprime
mortgages issued by commercial banks, which were then securitized by investment
banks, started the dominoes toppling. Lehman Brothers and Bear Stearns were
among the lead engineers of the securitization of mortgages, which enabled
mortgage lenders to offer home buyers all sorts of not-so-smart loans. Wall
Street loved these mortgage-backed securities and even more obscure derivatives.
Investment
banks churned out billions of dollars worth of dubious collateralized debt
obligations (CDOs)—that is, bonds backed by pools of mortgages.
To
cut risk, they bought insurance contracts called credit default swaps from
companies like AIG, which insures some US$ 441 billion of CDOs.
Put
simply, credit default swaps are insurance for bonds. Bond owners buy swaps to
protect themselves in case a company can’t pay off its debt. Financial
institutions can insure a bond even if they don’t own it. These swaps are
privately negotiated contracts—that is, they don’t trade on exchanges.
However, nine of the largest taxable bond funds in Morningstar’s
database—and nearly 10 percent of all the taxable bond funds it tracks—list
swaps in their portfolios, according to BusinessWeek.
The
massive credit default swap market became so complex that some firms lost track
of their stakes. Somehow the world ended up with US$ 62 trillion worth of credit
default swaps, according to The
Economist.
The
risk, of course, was that housing prices would fall and credit would dry up, two
things everyone agreed would never happen. When they did, the consequences were
shocking.
New
Regulation
What
does this mean for insurance companies? For starters, shareholder advocates have
already begun to demand another overhaul of corporate governance regulations.
Insurers are already some of the most regulated companies in the country and
compliance is very expensive. Just complying with Sarbox means re-tooling
information technology systems, adding compliance executives and paying board
audit committees for doing more work.
Let’s
take a closer look at unfolding legislation.
On
October 3, President bush signed into law the Emergency Economic Stabilization
Act of 2008 (H.R. 1424), a response to the economic crisis that authorizes the
U.S. Secretary of the Treasury to spend up to US$ 700 billion to purchase
distressed assets, especially mortgage-backed securities, and to make capital
injections into banks. It is this Act to which people are referring when they
talk about the federal bailout. Its primary goal is to restore confidence in the
credit markets. Proponents believe it’s the only way to prevent the current
recession from turning into a full-blown economic depression. Opponents object
to the massive cost taxpayers must shoulder and believe companies should sink or
swim based on the merit of their business decisions.
The
Troubled Assets Relief Program (TARP) is the organization that dispenses the
bailout dollars. The program is run by the Treasury’s new Office of Financial
Stability.
TARP
allows the U.S. Department of the Treasury to purchase illiquid, difficult to
value assets from banks and other financial institutions. The targeted assets
are mortgage-backed securities—often dubbed “toxic” assets—that
investment banks created by pooling and commingling prime and sub-prime
mortgages and then securitizing them. TARP also allows the Treasury to purchase
whole loans and to make direct equity investments in financial institutions.
The
Treasury may draw up to US$ 250 billion for immediate use. Presidential approval
is required for a draw of the next US$100 billion. The final US$ 350 billion
requires Congressional approval.
On November 12, US$ 290
billion of the first $350 billion allotment funding TARP had been allocated,
primarily through the Capital Purchase Program ($US 250 billion for bank stock
purchases and US$ 40 billion for an equity infusion into insurer American
International Group). Secretary of the Treasury Paulson has hinted that that
reviving the securitization market for consumer credit will be a priority for
the second allotment.
Under the voluntary TARP
Capital Purchase Program, the Treasury purchases preferred stock from
participating companies, a move that gives participants a cash infusion. The
minimum subscription amount available to a participating institution is one
percent of risk-weighted assets; the maximum is the lesser of US$ 25 billion or
three percent of risk-weighted assets. The program is available to qualifying
U.S. controlled banks, savings associations, and certain bank and savings and
loan holding companies that are engaged only in financial activities and that
elected to participate no later than November 14.
The
program has other strings. Companies participating in the program must adopt the
Treasury Department’s standards for executive compensation and corporate
governance, for the period during which Treasury holds equity issued under this
program. These standards generally apply to the chief executive officer, chief
financial officer, plus the next three most highly compensated executive
officers. Participating companies must ensure that incentive compensation for
senior executives does not encourage unnecessary and excessive risks that
threaten the value of the financial institution; “claw back” any bonus or
incentive compensation paid to a senior executive based on statements of
earnings, gains or other criteria that are later proven to be materially
inaccurate; refrain from making any golden parachute payment to a senior
executive; and agree not to deduct for tax purposes executive compensation in
excess of US$ 500,000 for each senior executive.
In
unveiling the Capital Purchase Program, the Treasury Department required nine of
the nation’s largest financial-services companies to sell a total of US$ 125
billion in preferred stock to the government: Citigroup, Goldman Sachs, Wells
Fargo, JPMorgan Chase, Bank of America, Merrill Lynch, Morgan Stanley, State
Street Corp. and Bank of New York Mellon Corp. As of January,
150 companies participate in the program, having sold some US$ 244
billion in preferred stock.
Who
is eligible to participate in TARP? It’s a bit unclear. The Emergency Economic
Stabilization Act states that “financial institutions” will be included in
TARP if they are “established and regulated” in the United States. The
Treasury must define these terms. It appears several institutions will be
eligible: U.S. banks, U.S. branches of a foreign bank, U.S. savings banks or
credit unions, U.S. broker-dealers, U.S. insurance companies, U.S. mutual funds
or other U.S. registered investment companies, tax-qualified U.S. employee
retirement plans, and bank holding companies.
Nine
days after President Bush signed the Act into law, however, he and Secretary of
the Treasury Paulson announced they would re-direct TARP to bank equity
investments. That’s why the first US$ 250 billion allotted to the program went
to the aforementioned 150 banks, including the original nine the Treasury
“persuaded” to participate.
Some
insurers are hoping for a piece of the TARP pie. The only insurer to get help so
far is AIG, which received a non-TARP capital infusion from the Federal Reserve,
and Treasury Secretary Paulson has yet to decide if others will follow. The
American Council of Life Insurers (ACLI) and the Treasury continue to talk about
help for the insurance industry with equity investments. Also lobbying for TARP
dollars is the Financial Services Roundtable, which has sent a letter to the
Treasury asking that the government interpret its new TARP powers broadly and
include insurers, among others. But many inside the Beltline are lukewarm about
government investments in insurers, saying the main focus should be stabilizing
the banking system and encouraging more lending.
Another
Treasury Department program in which financial institutions may participate is
the Temporary Guarantee Program for Money Market Mutual Funds, which was
announced on September 29. Under this program, the Treasury will guarantee to
investors that they will receive US$ 1 for each money market fund share held as
of close of business on September 19, 2008. The guarantee is triggered if a
fund’s net asset value falls below US$ 0.9995 per share, which is commonly
referred to as “breaking the buck.” The program was launched the week after
The Reserve Primary Fund broke the buck, becoming only the second money market
mutual fund in history to dip below a US$ 1 net asset value, an event that set
off a national run of redemptions on money market funds.
Funds
that broke the buck before September 19 are not eligible for the program.
Following an initial three month term, the Secretary of the Treasury had the
option to renew the program for an additional period up to September 18, 2009.
He has since extended the program to April 30, 2009. The program is open to
publicly offered money market mutual funds, including both retail and
institutional funds and taxable and tax-exempt funds.
Money
market funds play an important role as an investment vehicle for many Americans.
They also are a fundamental source of financing for capital markets and
financial institutions. The program is designed to boost market confidence and
alleviate investors’ concerns about the ability for money market mutual funds
to absorb losses.
Fund
companies ranging from American Century to Van Kampen are participating in the
program, as are insurers, among them Prudential Financial, TIAA-CREF, Hartford
Financial Services, AIG SunAmerica, Symetra Life and others.
The
Treasury Department and banking regulators have launched many additional
initiatives to unlock frozen credit markets and help restore confidence in the
nation’s financial system. While they are too numerous to list here, they
include an FDIC plan to shore up its deposit insurance fund by doubling the
assessment rate banks pay into the fund as well as the Federal Reserve’s new
commercial paper funding facility (CPFF) that buys up short-term debt to loosen
up the credit markets. Since September 2007, the Federal Reserve has cut its
benchmark target rate from 5.25 percent to zero percent. There also was the
Federal Reserve’s unprecedented move last Fall join five other central banks
in simultaneously reducing their benchmark interest rates by a half percent and
the Treasury’s hosting a meeting of the finance ministers and central bankers
from the G-7 countries.
At
press time, the National Association of Insurance Commissioners (NAIC) had just
wrapped up its annual winter meeting in Texas. All eyes are on its Capital and
Surplus Relief Working Group, which was formed to study a proposal by the
American Council of Life Insurers (ACLI) to loosen capital requirements to help
life insurers meet required reserve levels amid falling stock prices and a
worsening economic climate. The ACLI proposal addresses four areas: life
insurance reserves; annuity reserves and risk-based capital; risk-based capital
for investments; and accounting for deferred tax assets. The working group,
which is coordinating with other NAIC panels, will recommend temporary or
permanent actions they hope will be adopted shortly. The working group’s
public comment period ended on December 26 and it will hold a public hearing on
January 27. State legislatures and regulators must then decide whether or not to
act on those recommendations.
Another
issue spins around the bank holding organizational structure, which supposedly
confers federal regulation advantages. Companies that reorganize as banks (as
American Express and securities firms Goldman Sachs and Morgan Stanley did in
September 2008) may be able to more easily participate in TARP and get direct
loans from the central bank. Under the current rules of TARP, institutions must
own federally regulated entities, such as thrifts, to be eligible. And the
Treasury, which oversees TARP, has always relied on federal regulators to let
the government now how strong financial institutions are and how much capital
they need. The U.S. insurance industry is regulated by states, not by the
federal government. However, some insurers are federally regulated, while others
have subsidiaries that submit to federal oversight.
The
deadline for making a bank move was November 14. Prudential Financial already
owns Prudential Bank & Trust, a federal savings bank, so the insurer could
be considered a savings and loan. MetLife also could qualify for government
investment because it became a bank holding company in 2001.
Hartford
has purchased Sanford, Fla.-based Federal Trust Corp., which should allow it to
convert to a savings-and-loan holding company and qualify for US$ 1.1 to 3.4
billion from the Treasury. On
January 12, the office of Thrift Supervision (OTS) gave Hartford a thrift
charter.
Genworth
and Lincoln Financial are seeking reorganization as savings and loan holding
companies as well. Genworth has bought Inter Savings Bank of Maple Grove, Minn.,
while Lincoln has bought Newton County Loan & Savings of Goodland, Ind. On
January 12, the OTS gave Lincoln a thrift charter.
Aegon
NV, the Dutch insurer that got a three billion euro infusion from the
Netherlands government in October 2008, plans to buy Suburban Federal Savings
Bank of Crofton, MD. Aegon owns U.S. insurer Transamerica.
Yet
another issue on the regulatory front is the Gramm-Leach-Bliley Act of 1999.
Many pundits have begun to question the wisdom of Gramm-Leach-Bliley, which
repealed the Glass Steagall Act. The Glass Steagall Act set forth a set of
banking regulations that separated commercial banks and investment banks. This
way investment banks could take on risky investments and commercial banks could
protect their members. Under Gramm-Leach-Bliley, commercial banks can make the
same risky bets as investment banks, such as mortgage-backed securities,
collateralized debt obligations and other structured investment vehicles.
Staying Afloat
Life
insurers face not only heightened regulation, but also impaired financials.
“Rising investment losses, falling equity markets, and weakening economic
conditions will pressure the profitability, financial flexibility and capital
adequacy of [life] insurers over the next 12 to 18 months,” says Laura Bazer,
vice president, Moody’s.
Investment
returns underpin everything from operating capital to the guarantees in variable
products offered to consumers. When they plummet, it’s not pretty.
Massive
investment portfolios back the products of life insurers and they are taking
losses on those portfolios. For starters, insurers have been hit with billions
of dollars in unrealized losses as investment-grade corporate bonds suffer big
declines. They also are in the midst of writing down investments in financial
firms that have collapsed. Both hurt earnings. While Hartford Financial,
Prudential and MetLife have been hit especially hard, they are not alone. In
aggregate, the industry’s realized losses through June 30, 2008 were US$ 7.9
billion, according to A.M. Best. If the investment losses keep mounting, they
will start eating away at insurers’ capital.
In
addition, the economic downturn has battered stock prices in all industries and
the life insurance sector is no exception. According to the Wall
Street Journal, “shares of life insurers have been widely sold off in recent months
because of concerns about steep investment portfolio losses and charges against
earnings tied to their businesses of selling variable annuities with guaranteed
minimum returns. Investors have worried that insurers will be hard pressed to
come up with additional capital they may need to show regulators they can
deliver on promises to consumers.”
According
to Bloomberg, life insurers including Prudential and MetLife lost more than half
of their market value [in 2008] as plummeting stock and bond markets lowered the
value of investments that insurers use to back policies. The stocks of Genworth
and Hartford also have been hit hard. Again, these companies are not alone.
Between December 2007 and December 2008, the Dow Jones U.S. life insurance index
(DJUSIL) fell nearly 65 percent.
The
first week of December, Prudential Financial and Hartford Financial Services
announced they would not have to raise additional capital any time soon. On the
news, their stock prices soared, as did those for other life insurers,
especially Lincoln National, MetLife and Principal Financial.
What
about income from product sales and premium streams?
If
financially stressed consumers decide they can’t afford insurance premium
payments anymore, they may cash out of existing life contracts or delay
purchasing additional coverage, depriving the carrier of an important revenue
stream. Nevertheless, most industry insiders expect sales will hold steady in
2009; after all, insurance does offer a secure future for loved ones, a
compelling proposition when a family’s current financial picture is dicey.
Whole life is the gold standard and term life is an exceptionally budget
friendly alternative.
If
consumers do move away from variable products because of equity market
volatility, they probably will move toward fixed products with premium, cash
value and no-lapse guarantees. Variable and indexed annuities are on a more
precarious footing, but fixed and immediate annuity products should sell well as
consumers seek risk free investments. According to A.M. Best, sales of
individual variable annuities in the first six months of 2008 were down 12.5
percent, while sales of individual fixed annuities were up 34.2 percent.
In
an extended down market, insurers can run into trouble if variable life and
annuity product account values fall below the guaranteed amount they have
promised contract owners. To offset this risk, they use hedging vehicles and
reinsurance treaties, but these strategies are expensive and reduce product
profitability.
Asset-based
fee revenues are another challenge. Variable life and annuity products have
mutual-fund-like subaccounts. When the stock market falls, insurers face reduced
fee revenue as their assets under management shrink. Shrinking AUM also impairs
regulatory capital adequacy, given reserve and capital requirements on variable annuities with secondary
guarantees. And the greater costs associated with hedging programs on variable
annuities place more pressure on product profitability.
Yet
another challenge for life insurers in today’s economic climate is their
bancassurance relationships. Banks are an important distribution channel for
life company products, especially annuities. So what happens when these
distribution partners fold? The current turmoil and consolidation in the banking
sector directly affects life insurers that sell through the bancassurance
channel. For starters, they must convince bank customers that their annuity
investments are safe. They also must compete for shelf space in a shrinking
sector as banks go belly up and are absorbed by other banks. The challenge is
quite real. WaMu and Wachovia, for instance, are top five annuity and mutual
fund distributors.
Good
News?
Is
there any good news out there? In a word, yes.
First,
consumers don’t seem to be panicking.
Despite
a sharp increase in pessimism about the U.S. economy, most consumers are sitting
tight when it comes to their investments, savings, banking and insurance
arrangements, according to an October 2008 LIMRA International survey. “Even
with the overwhelming news coverage of the current economic crisis, only 16
percent of consumers surveyed had taken any action with regard to their
financial portfolios,” says Robert Baranoff, LIMRA senior vice president for
member benefits. When asked how they plan to adjust their finances in the
future, 52 percent said they plan to reduce debt; 41 percent will delay making
investments; 21 percent will put off buying insurance; 12 percent will reduce
contributions to their retirement plan; 11 percent will take money out of
non-retirement savings and investments; and five percent will cancel or reduce
their insurance (but six percent plan to purchase more).
In
addition, two in three financial advisors believe the government’s Wall Street
rescue plan will work and expect the S&P 500 to rise between 10 and 25
percent by year end 2009, according to a recent survey conducted by Horsesmouth.
Movement within their clients’ portfolios has been relatively low. Only 11
percent of advisors said they had made changes to a half or more of their
clients’ portfolios. More than 74 percent of advisors said they had made
adjustments to 15 percent or less of their clients’ investments. And only nine
percent said they are struggling to keep clients.
Second,
the industry is well positioned to handle the pressures of rising investment
losses, falling equity markets and tough economic conditions.
Life
industry fundamentals are strong and the market value of individual companies
(stock price) continues to rally not only on announcements from leading insurers
about their solid capital positions but also on expectations from the NAIC
Winter Meeting/ACLI proposal. Although the rating agencies—that is, Standard
& Poor’s, Fitch Ratings, A.M. Best and Moody’s—all revised their
outlook for the industry from stable to negative last Fall, they all stated the
industry’s long term fundamental strengths are intact and that most companies
are well positioned to take advantage of emerging opportunities.
In
aggregate, the industry has more than sufficient capitalization and liquidity;
liabilities that are protected by surrender charges; investment portfolios
chockfull of highly marketable securities; and excellent asset-liability
management protocols
Third,
life insurers are bolstering their capital positions by scaling back on
investments, trimming dividends, selling additional shares to investors and
more.
Prudential
Financial, for example, has cut its dividend in half and applied to participate
in the TARP Capital Purchase Program in December 2008. Principal Financial and
Hartford Financial Services have signaled they are interested in TARP dollars.
MetLife has not publically expressed any interest in TARP, but it sold US$ 2.3
billion in shares in October 2008 to bolster its capital. Hartford Financial cut
its dividend in October 2008 and accepted a US$ 2.5 billion investment from
German insurer Allianz SE to bolster its capital position. Principal Financial
has cut its dividend and suspended stock buybacks.
Fourth,
as the financial services landscape shifts, so do acquisition opportunities.
AIG’s decision to sell off most of its life insurance operations worldwide,
for example, offers tremendous opportunity to life insurers that want to
solidify their positions in certain global markets or to enter new global
markets.
Finally,
investor optimism is poised for a comeback. On January 2, the Dow Jones
industrial average closed above 9,000 for the first time since November 5 and
analysts say the first quarter of 2009 will tell if investors’ hopes of
catching a prolonged rally will outweigh their fears of a prolonged downturn.
About US$ 9 trillion is sitting on the sidelines in cash and money market
accounts, according to Joe Bel Bruno of the Associated Press.
Wild
Card
Of
course the wild card in all this is new President Barack Obama.
The
credit crisis emerged as the dominant issue of the presidential campaign in the
last two months before the election and many exit polls showed that Obama’s
election on November 4, 2008 was partly due to the economic crisis and that many
voters believed he was more capable of handling the economy than John McCain.
Obama signaled his intentions to make the economic crisis a priority in his
administration by convening a meeting of his top economic advisors—including
the billionaire investor Warren Buffet; two former Treasury secretaries,
Lawrence Summers and Robert Rubin; former Federal Reserve Chairman Paul Volcker;
and Google CEO Eric Schmidt—just three days after he was elected.
Will
President Obama break a 30-year tilt toward business deregulation and against
new rules? Will he expand the government’s role in financial markets? Your
guess is as good as ours, but you can count on Resource
keeping you posted on developments as they unfold. n
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