2009 Prediction Update #2

In my 2009 predictions post I wrote about the potential for insurance companies to default on guaranteed life insurance annuities. Last week this idea hit the mainstream news when the Wall Street Journal wrote a piece on it:

So it isn't surprising that, when 2008 ended, many executives, analysts and regulators took a sigh of relief as they examined preliminary results of four months of extreme stress. "The industry took a body blow, and it still remains viable -- not as strong as it was, but viable," says Connecticut Insurance Commissioner Thomas Sullivan.

Of course, markets are still unstable, and getting through 2008 proved expensive at some companies because of shortcomings of the risk-management efforts. Insurers collectively have taken charges against earnings totaling billions of dollars. To show regulators they can fulfill their promises, they've either raised new capital to further back the guarantees, or have transferred it from other parts of their operations.

Some insurers' shares are off more than 80% over the past year, reflecting stockholders' worries that the companies may need to take more charges and raise more capital. They'll learn more details this week, when many U.S. insurers will post fourth-quarter results.

A new worry also has surfaced: Volatile stock markets and low interest rates in recent months have pushed hedging costs to sky-high levels. Numerous insurers have begun raising prices or trimming guarantee features to try to bring the promises in line with the costs. Some price increases apply to existing annuity owners, as do changes like the elimination of some risky stock funds from the lineup. Consultants anticipate more changes ahead.

Now that we are two months into 2009, things haven't gotten any better and don't look to improve anytime soon. Just tonight a new story came up regarding Hartford Life and its plans to request capital relief. Interestingly the same man, Thomas Sullivan, who said the industry was viable at the end of 2008 now two months later says...err doesn't say:

In a statement Friday Connecticut Insurance Department Commissioner Thomas R. Sullivan said he couldn't comment publicly on such requests or the department's analysis.

"The Connecticut Insurance Department takes seriously its obligations to monitor and review the financial positions and solvency of insurance companies licensed to do business in this state. We will continue to be vigilant on this front and be guided by balancing what is in the best interest of the consumer and the companies while also maintaining a sound and competitive marketplace," he said in an emailed statement.

Last month, the National Association of Insurance Commissioners turned down a request by life insurer groups to cut regulatory capital requirements."

"Going forward, Hartford will refashion its variable annuity offerings to present less risk. A new product it will launch in May will offer much-valued lifetime income, but will come with less features and a lower price than what some competitors are offering."

Interesting. Looks to me now that "money doesn't always grow at X%" the math's not adding up. Lets check back in on this idea in two more months and see where we are by then. My guess is that our friend Tom Sullivan and his industry will have taken much more than a body blow because as of now there is a red dot squarely on their foreheads.