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May 1, 2008

News Digest

Hedging has saved US insurers billions... Aegon opts out of participation in TARP... SEC snatches control of indexed annuities...

By Verdict Staff

Hedging has saved US insurers billions…

Aegon opts out of participation in TARP…

SEC snatches control of indexed annuities…

Swiss Life pins its hopes on AWD Group…

Canada’s health care cost burden grows…


Hedging has saved US insurers billions

Hedging strategies applied by US life insurers to protect themselves against losses on variable annuities (VA) with guarantees have proved highly effective during periods of extreme market volatility, reveals a study conducted by consultancy and actuarial services company Milliman.

Based on an analysis of the effectiveness of hedging strategies of its internal clients during September and October 2008 Milliman found that VA hedging programmes had been 93 percent effective. Milliman estimates that on an industry-wide basis this resulted in the saving of $40 billion in assets of insurers.

“Since the last severe market downturn in 2001 many insurers have developed more robust guarantee hedging programmes that are built to provide substantial protection against severe market declines,” said Ken Mungan, head of Milliman’s financial risk management practice.

He added that the hedging programmes are comparatively simple compared to the complex structured financial products which sparked the financial crisis.

In conclusion, Mungan said success of the hedging programmes is likely to spur further innovation by VA writers and other financial product companies seeking to protect themselves against market volatility.



Aegon opts out of participation in TARP

In a sudden about turn Dutch insurer Aegon has announced that its US unit Transamerica has withdrawn its application for participation in the US federal government’s Troubled Asset Relief Program (TARP). Announced in October 2008, the TARP was instituted to buy equity stakes in banks in need of financial assistance.

To qualify to participate in the TARP a number of life insurers announced acquisitions of savings and loan institutions, better known as thrifts, which are regulated by the Office of Thrift Supervision (OTS) and fall within the definition of banks. Transamerica applied to acquire Suburban Federal Savings Bank.

In a brief statement on its decision not to pursue the TARP, Aegon’s chief financial officer Jos Streppel commented: “The ongoing steps we are taking have positioned Aegon to enter 2009 with a strong capital position.”

Aegon has also withdrawn its application to the OTS to gain a thrift charter.



SEC snatches control of indexed annuities

Despite strong lobbying spearheaded by the National Association of Insurance Commissioners (NAIC), the US Securities and Exchange Commission (SEC) has approved a rule that will enable it to regulate indexed annuity products as securities with effect from January 2011.

The SEC’s decision was motivated by its view that individuals who purchase indexed annuities are exposed to “a significant investment risk” in the form of volatility of an underlying securities index.

“Insurance companies have successfully utilised this investment feature, which appeals to purchasers not on the usual insurance basis of stability and security, but on the prospect of investment growth,” emphasised the SEC

The SEC’s decision received a cold welcome from the NAIC which views it as a “challenge” to state insurance regulatory oversight.

“We are very dismayed the SEC chose to ignore thousands of comment letters opposing this rule,” said NAIC vice-president and Iowa Insurance Commissioner Susan Voss.

“The states have a demonstrated record of consumer protection, and we do not believe this rule is in the best interest of insurance consumers,” she stressed.

According to the SEC, some $123 billion is currently invested in equity-indexed annuities.



Regulators seek closer global co-operation

The New York State Insurance Department (NYSID) and the UK’s Financial Services Authority (FSA) have signed a memorandum of understanding (MoU) establishing a formal basis for consultation, co-operation and co-ordination.

The MoU is the fourth such MoU initiated by the NYSID in 2008. Other regulators involved are Germany’s Bundesanstalt für Finanzdienstleistungsaufsicht, the Bermuda Monetary Authority, France’s Autorité de Contrôle des Assurances et des Mutuelles and Taiwan’s Financial Supervisory Commission.

“The FSA and the Department have demonstrated, most recently through our work on monolines and during the current financial crisis, that international co-operation is essential to protect policyholders and provide the security that is fundamental to the industry’s success,” commented the NYSID’s superintendent Eric Dinallo.

Entities regulated by the NYSID have assets under management in excess of $4 trillion.



Swiss Re bolsters life reinsurance capacity

Sensing what it termed “significant opportunities”, Swiss Re has bolstered its life reinsurance capacity in the form of a $1.5 billion letter of credit (LoC) facility extended to it by US investment bank JPMorgan. The LoC matures in 2028 and has a pricing rest feature after the first 10 years.

“Notwithstanding the difficult capital market environment, we have concluded an attractive, long-term arrangement with JPMorgan which will further enhance our position to be able to benefit from opportunities that arise from the current market environment,” commented Swiss Re CEO Jacques Aigrain.

“Clients turn to us as they look for a very strong counterparty in terms of superior capital and liquidity – and we are responding accordingly,” he added.

Swiss Re noted that the LoC facility replaces and expands arrangements it now has in place required to meet US regulatory requirements for its life business.

Indicative of opportunities, US insurer The Phoenix Companies (TPC) announced on 31 December that it had entered into a reinsurance deal with a Swiss Re unit Reassure America Life Insurance Company involving a block of TPC’s life insurance policies.

Beyond stating that the deal was aimed at improving TPC’s capital position, no details were released.



IBM lands £200m Friends Provident deal

As part of its drive to trim annual costs by £40 million ($60 million) by the end of 2009, UK life insurer Friends Provident is to outsource management of its information technology systems to IBM.

The contract, which extends for 10 years, is worth a total of £200 million to the US technology giant and is aimed at achieving initial annual savings of £6 million.

The outsourcing deal includes every aspect of the insurer’s technology infrastructure including software, hardware and services and the opportunity for all hardware to be updated. In addition, Friends Provident will in future have the ability access mainframe capacity on demand from IBM via the internet, a concept that has become to be referred to as cloud computing.

“By partnering with IBM, one of the world’s leading technology providers, we will gain access to the latest processing power and the expertise to improve our service and technology further,” commented Friends Provident’s CEO Trevor Matthews.



ABI proposes external actuarial reviews

The Association of British Insurers (ABI) has launched a consultation on proposed guidance for life insurers on when internally sourced actuarial advice should be subject to external review.

The ABI outlined that under its proposed guidance an external review of internal actuarial advice should happen when advice:

• Influences decisions that can result in significant changes in the running of life insurance policies and, thus, policyholder benefits;

• Affects the decision to enter into and/or the price paid in large transactions;

• Is critical to the implementation of material new regulatory or equivalent requirements; and

• Is provided in an area where the insurer’s governing body is aware that industry practice may have developed significantly since the last advice was obtained.

Responses to the ABI’s proposed guidance are due by 31 March 2009. The ABI’s guidance will be issued in July 2009 and will apply from 30 September 2009.



ING bows to consumer groups’ pressure

ING has reached an agreement with Dutch consumer organisations Verliespolis and Woekerpolis resolving a dispute related to cost charges to individual universal life insurance products sold to customers in the Netherlands.

Under terms of agreement ING’s Dutch insurance subsidiaries will offer compensation to policyholders where individual universal life policies have a cost charge in excess of an agreed maximum.

ING estimates that the cost of the settlement will total €365 million ($475 million), provision for which was made in the third quarter of 2007.

ING’s settlement follows a similar agreement reached by Delta Lloyd Group (DLG), the Netherlands unit of UK insurer Aviva, with the consumer organisations in September 2008 under which DLG agreed to compensate 200,000 aggrieved unit-linked policyholders. The adverse impact of the agreement on DLG’s embedded value is expected to be about €300 million before tax.



US insurer ventures into Albania

In an open bid process, the Albanian Ministry of Finance (AMF) has accepted American Reserve Life Insurance’s (ARLI) offer of €25 million ($32 million) to acquire a 61 percent stake in state-owned composite insurer INSIG. The remaining 39 percent of INSIG’s issued capital is owned equally by the World Bank’s International Financial Corporation and the European Bank for Reconstruction and Development.

INSIG was established in 1991 as a state-owned monopoly, a privileged position it lost 1999 when a decision was made by Albania’s government to open the market to private insurers. INSIG, which ranks as Albania’s second-largest life insurer and third-largest general insurer, operates in Albania, Kosova and Macedonia.

According to the AMF, INSIG recorded total revenue of €17 million in 2007 and net earnings of €1.8 million. INSIG ended 2007 with total assets of €50 million.

Established in 1922, Texas-based ARLI is a wholly-owned unit of Heritage Guaranty Holdings, a privately owned company that also controls Liberty Bankers Life, Mid-Continent Preferred Life and Winnfield Life.



US third-quarter life sales take a big hit

Plunging equity prices took a heavy toll on sales of variable life insurance products in the US in the third quarter of 2008, reveals data produced by research and consulting organisation LIMRA International.

Suffering the most damage were variable life (VL) products, which saw sales based on annualised premium income plummet 41 percent compared with the third quarter of 2007.

During the first three quarters of 2008 VL sales were down 29 percent compared with the same period in 2007.

Almost as bad were variable universal life sales, which fell 33 percent in the third quarter of 2008 and 17 percent in the first three quarters of the year.

The third quarter saw positive growth in only one product-class – whole life, with sales up 7 percent compared with the third quarter of 2007 and 4 percent up during the first three quarters of 2008.

This was, however, not enough to prevent total life sales in the third quarter falling by 11 percent and sales in the first three quarters by 4 percent.



Swiss Life pins its hopes on AWD Group

Despite having its growth targets mauled by events in financial markets in 2008, Swiss Life reiterated at an investors day held in December that it intends to position itself as “the leading international life and pensions specialist.”

Switzerland’s largest life insurer is, in particular, pinning its hopes on its German-based financial advisory unit AWD Holdings to play a key role in achieving this objective. AWD, in which Swiss Life acquired a 97 percent stake in 2008 for CHF1.7 billion ($1.5 billion), is tasked with increasing sales revenues to €1 billion ($1,3 billion) by 2012, up 31 percent from the €762 million reported in 2007.

AWD’s earnings before interest and taxes are forecast to reach €130 million in 2012, up 54 percent from €84.5 million reported in 2007.

According to Swiss Life the major driver of these ambitious targets will be an increase in the number of AWD’s financial advisers from the current 6,300 to 8,500 in all its core markets: Germany, the UK, Switzerland, Austria and five developing markets in Central and Eastern Europe.

In 2007 AWD reported a total customer base of 1.97 million, of which it had advised 487,600 during the year.



Royal London unveils international brand

Royal London, the UK’s largest mutual life insurance and pension company, has unveiled a new brand identity for Scottish Life International and Scottish Provident International, its two international businesses, which are due to be combined in 2009.

The two units will be unified under the new banner of Royal London 360°, which will be based in the Isle of Man, and be identified by a new red and black logo supported by the slogan ‘You can count on us’.

Focus of Royal London 360° is on personal investment management and what the insurer terms “specific investment and tax efficient products” marketed through intermediaries in markets including the UK, Germany, the Middle East and South Africa.

As at 30 September 2008, Royal London had 3.5 million customers and total assets under management of £34.5 billion ($51 billion).



SEC report backs fair value accounting

Improve rather than suspend fair value accounting (FVA) standards is the message that comes from a 211-page report by the US Securities and Exchange Commission (SEC).

Among the SEC’s key findings was that investors generally believe FVA increases financial reporting transparency and facilitates better investment decision-making.

The report also observes that FVA did not appear to play a meaningful role in US bank failures in 2008.

Rather, the report indicated that bank failures appeared to be the result of growing probable credit losses, concerns about asset quality, and in certain cases, eroding lender and investor confidence.

The SEC did, however, make eight recommendations aimed at enhancing FVA.

These included development of additional guidance for determining fair value when relevant market information is not available in illiquid or inactive markets and how to determine when markets become inactive and whether transactions are forced or distressed.



US subprime crisis may be far from over

Insurers and banks hoping to recoup all or most of their unrealised losses on US residential mortgage backed securities may have to rethink their strategy, suggests a study by the US National Association of Consumer Bankruptcy Attorneys (NACBA).

Quite simply, foreclosure prevention programmes put in place to prop up homeowners struggling to meet mortgage repayments are a failure, according to the NACBA.

The NACBA explained that it reviewed publicly available data about the reach of the refinancing programmes such as the key Hope for Homeowners Act passed by Congress in July 2008 on the strength of forecasts that 400,000 homeowners would be aided.

At the time of publication of the NACBA’s study in mid-December there had been only 312 applications for assistance under the programme.

The NACBA’s finding came on the heels of a projection from financial services group Credit Suisse that “over 8 million foreclosures [are now] expected” over the next four years in the US. This would account for 16 percent of all mortgages, including 59 percent of all subprime mortgages and 11 percent of all other mortgages.

The Credit Suisse forecast is up sharply from foreclosures in the two to six million range cited in previous estimates, noted the NACBA.



IRDA acts to bolster slumping sales in India

In a move aimed at reversing a sharp fall in new business volumes India’s insurance regulator, the Insurance Regulatory and Development Authority of India (IRDA), has reduced solvency margin requirements for unit linked products (ULIPS).

“ULIPS have lost their sheen among investors due to the volatility in the market,” said the IRDA’s chairman J Hari Narayan in a statement. “We see a slowdown in growth and the profitability of insurance companies will be eroded.”

For ULIPS with no guarantee margin requirements have been cut by 20 percent, while for ULIPS with guarantees the reduction is 10 percent. The move is of particular significance for private life insurers who have traditionally generated more than three-quarters of new business from ULIP products.

The reduction in ULIP reserve requirements followed a 25 percent reduction in reserve requirements for traditional life products in early December 2008.

Easing of reserve requirements followed in the wake of the latest industry sales data from the IRDA that reflected a 37.6 percent fall in new business between September and October. The 21 private life insurers recorded a 32.6 percent fall in sales to INR23.04 billion ($475 million) between September and October. ICICI Prudential, a joint venture between UK insurer Prudential and Indian bank ICICI Bank, remained top private insurer in October with sales of INR4.06 billion.



Reinsurers in fine form

The reinsurance industry has remained substantially unscathed by the turmoil in global capital markets with a capital base still largely intact and liquid, Willis Re, the reinsurance unit of insurance broking company Willis Group, asserts in its latest quarterly renewals review.

A notable finding of the report is that primary insurance companies facing new capital pressures are increasing their demand for reinsurance and other reinsurance mechanisms to protect and enhance their capital positions. This situation places reinsurers in an “excellent position” to win back market share, observed Willis Re’s CEO Peter Hearn.

However, reinsurers are acutely aware that access to new capital in 2009 will become more difficult and expensive.

“As a result, reinsurers are seeking to optimise returns on existing capital bases via constrained risk appetites and elevated risk charges,” said Hearn.



India set to ease cap on foreign investment

Following two years of consideration by the cabinet of India’s coalition government, the United Progressive Alliance (UPA), a bill that will raise the maximum limit foreign companies can hold in Indian insurers from 26 percent to 49 percent was presented to the Rajya Sabha, the upper house of parliament, in the last week of 2008.

The bill met with stiff opposition from the Communist Party of India (CPI), long an opponent of increasing foreign stakes in Indian financial services companies. Indeed, Indian media reported that a scuffle broke out between a member of the CPI and a member of the UPA just prior to the bill’s reading in the Rajya Sabha.

Still subject to assessment by the parliamentary standing committee on finance, the bill is unlikely to be approved until after the national election to be held in India in May 2009.



Canada’s health care cost burden grows

In common with countries around the world Canada has long seen health care costs rise at above the general cost of living. This year will be no exception with the Canadian Institute for Health Information (CIHI) forecasting that total health care costs will rise by 6.4 percent to C$171.9 billion ($144 billion), or C$5,170 per person.

The CIHI noted that adjusted for estimated inflation and population growth, spending is expected to grow by 3.4 percent in 2008, which is similar to adjusted growth rates of recent years: 2.8 percent in 2007, 3.7 percent in 2006 and 2.8 percent in 2005.

Since 1997 the public and private sector shares of total health expenditure have remained relatively stable, with governments accounting for 70 percent and the private sector, including privately insured and out-of-pocket expenses, for 30 percent.

The CIHI anticipates that this balance will remain intact in 2008 with public-sector health care spending forecast at C$120.3 billion and private sector spending at C$51.6 billion.

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