Life Insurance Companies Likely to Join the Bailout Rolls

Life insurance companies, normally thought of as bastions of stability, have come under greater scrutiny from concern that their holdings of mortgage-backed securities and aggressive annuity guarantees may put their financial stability at risk. Where can you go to determine the strength of your insurer?

According to a report in yesterday’s Wall Street Journal, the Treasury Department will soon announce that TARP funds will be made available to insurance companies that own banks.

Although life insurers are closely regulated, there’s growing evidence that some insurers hold significant amounts of low-rated mortgage-backed debt. Financial Planning magazine cites data indicating that of $214 billion in mortgage-backed securities held by life insurance companies, $86 billion is invested in lower-rated assets.  Allianz SE, Allstate, and Manulife Financial are heavily exposed to mortgage-related securities.  Ratings agencies have been downgrading several insurers of late, making it harder for them to raise capital.

Meanwhile, Massachusetts Mutual, New York Life, Northwestern, and TIAA-CREF, are among a shrinking group of insurers that have maintained the highest (AAA) rating during the present economic crisis.

Besides uneasiness about the way that insurance company assets are invested, there is growing concern over the generous guarantees that some insurers have offered in order to sell variable annuities.  These are not being offered in new contracts, but when markets were strong, a handful of insurers sold variable annuity contracts with guarantees that promised minimum returns, as high as 7%/year, irrespective of the performance of the stock market.  The ability to deliver on those promised returns could be impaired by the stock market swoon and the general weakness of the financial markets.  Money Management Executive magazine and the WSJ report that many brokers who sell variable annuities are beginning to have doubts about whether insurers will be able to honor their variable annuity guarantees.

An infusion of TARP money would help insurers avoid having to sell securities at depressed prices in order to raise cash.  A number of life insurers either owned banks prior to the creation of the TARP or began acquiring them recently in an effort to qualify for funds.  Hartford Financial, Genworth, Lincoln National, Prudential, and MetLife are among the insurers that may qualify; all but MetLife have made moves to apply for federal funds to help prop up sagging capital.

On the positive side, life insurance companies rarely fail, and there are state guaranty funds that can provide some backup for funds lost to failed insurers.

If you’re shopping for insurance or an annuity, be sure that you do business only with the strongest companies.  If you already have a contract with a company that now seems shaky, make sure you understand all the consequences of terminating a your insurance policy or annuity before doing so.  For annuities particularly, termination can often trigger significant surrender fees.  As an alternative to simple termination and loss of benefits, life insurance contracts and annuities can often be exchanged using a procedure called a 1035 exchange, which preserves the tax benefits of your policy.

How to check on your life insurance company
The Insurance Information Institute has a nice article on assessing the strength of an insurance company.  The page includes helpful links to the ratings agencies, and ratings information is often available at no charge.  An insurance broker should also be able to provide you with ratings information.  The ratings scales differ from one agency to another, but there is a helpful chart on the III site showing the different ratings systems.

You should be particularly wary of an insurance company that has experienced several ratings downgrades.  Given economic uncertainties, this is a time for avoiding unnecessary risks.  Insurance policies and annuities are normally viewed as “risk-free” investments, but the present climate is a good time for policyholders to remember that an insurance guarantee is only as strong as the company backing it.

Addendum 4-10-2009:  The WSJ reported today that Genworth Financial has been unable to become a savings and loan holding company in time to qualify for TARP funds.  Consequently, the company is abandoning plans to acquire an S&L.

About the author

Thomas Fisher, CFP®

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