Update: My head is spinning. Allianz Life cannot make up its mind.
This article originally included a link to a Street.com story which stated that “five” insurance companies held more of the riskier bonds, the ones rated “A” or less, including Allianz Life Insurance, which caused Allianz to be “most vulnerable” to future financial pain.
When TheStreet redacted their story based on new information supplied by Allianz, I updated my blog to note the elimination of Allianz from this fivesome. The suggestion, of course, was “we don’t need to shore up our capital reserves.” Now a just day later Allianz comes along again and says, hey wait a minute, maybe we do need accounting relief from U.S. regulators. (This after rivals including Hartford Financial Services Group Inc. and Principal Financial Group Inc. won looser capital requirements). Read the double-talk here.
The life insurance industry has received not nearly as much negative publicity and scrutiny as the banking, investment or auto industries, even though it is suffering from many of the same troubling problems: grid-locked credit markets, management inepitude, poor risk management, and a complete disregard for customers and their needs. Take my word for it, before the financial crisis is over we’re going to see myriad changes in the way businesses run themselves, and nowhere is that more evident than in the insurance industry which is likely to undergo more changes than any other industry. And that could mean even greater opportunities.
Robert Kerzner, head of LIMRA International and LOMA told a recent insurance conference: “We are really seeing the beginning of something that, when Armageddon is over and the dust settles, I think that the industry in total is going to look quite different.” Kerzner went on to predict that there will be fewer companies, noting that industry watchers are already forecasting mergers and acquisitions on the horizon.
We all know the sad story of AIG, but that is only the tip of the iceberg and the entire industry is being negatively impacted by the financial crisis.
• The A.M. Best Company reported (Mar. 30, 2009) that the total admitted assets for the top 25 U.S. life/health companies declined 10.1% at the end of 2008 and declined by 8.7% for the entire industry.
• Aaron Elstein wrote in Crain’s New York Business “After gorging on dodgy debt, insurers are now feeling the pain. CreditSights estimates that MetLife, Prudential, Hartford and other large public life insurers collectively face about $80 billion in investment losses – enough to wipe out the insurers’ equity and demolish 38% of the industry’s total capital.”
• According to CreditSights, MetLife faces up to $30 billion in investment losses – nearly double the so-called adjusted capital that MetLife is required by regulators to set aside to cover its obligations. Prudential Financial Inc. is looking at $11 billion in loses, and Hartford Financial Services Group, Inc. as much as $15 billion. The three insurers’ cushions to absorb losses are tiny, with equity at less than 5% of assets.
These dire warnings of losses do not even include investments that insurance companies may have made in commercial real estate, which is predicted to be the next shoe to drop. Fitch Rating Service has reported that the credit quality of commercial mortgage-backed securities will likely decline this year as defaults rise and the real estate market deteriorates. According to SNL Financial the life insurance industry has $214 billion in commercial mortgage-backed securities.
Melissa Gannon, director of insurance and bank ratings for The Street.com recently reported that, “Fifteen of the top 20 life insurers had more commercial mortgage-backed securities than capital and reserves. Four of those companies held more of the riskier bonds, the ones rated “A” or less. They were Allstate Life; Manulife’s John Hancock Life; Genworth Life, part of Genworth Financial; and Hartford Life, a unit of Hartford Financial Services.”
More signs of crisis could be enumerated, but the best example of how bad things have become in the insurance industry is that the government has now decided that some companies are in such dire straights that they will make TARP bailout funds available. I guess that makes the point that while most of the attention has been given to problems in the banking and investment industries; the life insurance industry has a potentially deeper crisis boiling just below the surface. All of this leads to a simple question:
Is there opportunity in and for the life insurance industry in the future?
There is no question that the life insurance industry of the future will be structured and function differently — especially when it comes to risk assessment and risk management — than it does today. However, my belief is that opportunity for and in the life insurance industry is greater today than it has been in decades. After all, turmoil and change not only has the capacity to destroy the old order, but also to create new opportunity.
The first step to recovery and opportunity is for the industry to re-capture its traditional brand image with the public. For over a century the industry effectively cultivated a brand image as a conservative, safe and reliable source of financial security. Now, much of the respect and consumer confidence gained from that brand recognition has been damaged. It is important to recognize that the AIG fiasco was not the cause for this loss of industry brand respect. AIG is only the poster-child for a couple of decades of increasingly reckless activities by the entire industry.
When increasing top-line sales and short-term profits became the driving objective, rather than maintaining the traditional industry brand image, company management began to change its approach to product design and risk management. Products that were once sold predicated on value added were soon commoditized and offered based on price and gimmick. Risks that previously would have been shunned began to be accepted with increasing zeal; all in the name of greed. The turmoil and lack of consumer confidence being experienced by the industry today is the residue of this misguided approach.
Where the Opportunity Exists
The traditional icons of the life insurance industry – even if they survive – may never be able to recapture their trusted brand image with the consumer. However, a smaller or even new company may be able to emerge as a successful future leader of the insurance industry.
Clearly there is demand for the traditional products of the insurance industry that offer a conservative, safe and reliable source of financial security. This is especially true when it comes to capital accumulation fixed annuities and retirement income products. The consumer’s desire for safety and security in their financial lives has never been stronger. Unfortunately, the current financial crisis and lack of confidence in existing companies makes them incapable of taking advantage of this opportunity.
As Steven Morelli, senior editor for Insurance News Net wrote in a recent article, “One of the few bright spots in the insurance industry is starting to dim as carriers are cutting back on annuities just as demand skyrockets. Fixed annuity sales continue to smash records quarter after quarter but they are pressuring insurance companies’ already challenged reserves.” In fact, Aviva, the No. 1 annuities seller in the independent producer channel has virtually withdrawn from the marketplace.
The opportunity is present for a smaller, financially strong and well-funded company that has not been touched by the current financial scandal to position itself as a new order of company with the traditional brand image of safety and security. This company will develop and offer annuity and retirement income products that are simple, sound and safe. Unburdened by the current financial maelstrom or a bloated bureaucracy of hide-bound executives, this company will be able to take advantage of current technologies for low cost and efficient service to both policyholders and its distribution system. Speaking of distribution, such a company would be welcomed by the thousands of independent agents who seek to do the best for their clients and get back to what they do best – selling financial safety and security.
Will such a company emerge? Who knows? But I do know that this is the right time for such a company to come forward. As has been said before, in times of status quo and stability, the big companies always win, but in times of turmoil and volatility, it’s not the big companies that win, but the good ones.
And the Moral of the Story is …
These are the worst of times and the best of times for the life insurance industry. The industry has never been more threatened with a dark future than it is today, but the very issues of financial chicanery that have caused problems for the life insurance industry has created an even greater opportunity to meet the desire of the consumer to find a safe haven in the storm.
If a company can emerge bereft of the problems encumbering companies today and if it is prepared to meet the needs of the consumer for safe and secure financial products, it will not only find success, but may even lead the industry out of the morass it finds itself mired in today.
(“Due to incorrect information reported by TheStreet.com, it was earlier reported in this blog that Allianz held three times the amount of troubled mortgage-backed securities than it had in capital and reserves.” This statement, according to TheStreet, was based on information Allianz had provided to SNL Financial. Allianz has since corrected the data.)