“The insurance sector has bounced back reasonably well after the Great Recession. Investment returns and financial status have improved,” said Jack W. Plunkett, CEO at Plunkett Research Ltd., in a December press release.
It wasn’t just the financial crisis that took a large bite out of the insurance sector’s earnings in 2010, but also the BP Gulf of Mexico oil spill, earthquakes, windstorms, and other catastrophes, which cost the industry a bundle.
Worldwide, natural and man-made disasters resulted in a $36 billion drain on the financial welfare of insurance sector companies in 2010, a 34 percent increase over 2009, according to a preliminary year-end estimate by Swiss Reinsurance Company Ltd.
“If you look at what was thrown at the [insurance] industry in 2010, short of a major hurricane landing on U.S. soil, we pretty much got everything we could,” said Leo Grepin, senior partner at McKinsey & Company, in a recent Insurance Information Institute press release.
After several quarters of decline, insurance rates are on the rise again, according to James Wrynn, New York’s superintendent of insurance, in the Insurance Information Institute press release.
Insurance Sector Bailout
American International Group Inc. (AIG), a major global insurance provider, was considered “too big to fail” and therefore awarded U.S. federal government assistance to keep from defaulting on commitments. On Sept. 30, 2010, AIG owed the U.S. taxpayer $95.6 billion. The AIG Credit Facility Trust, controlled by three trustees, held a 92.1 percent controlling equity interest in AIG on behalf of the U.S. government.
AIG, as the sole user, received $69.8 billion from the Treasury’s Systemically Significant Failing Institution (SSFI) program, which “was established to provide stability and prevent disruptions to financial markets from the failure of institutions that are critical to the functioning of the nation’s financial system,” according to the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Quarterly Report to Congress released January 26. Overall, AIG received $182 billion from the U.S. Treasury.
At the end of 2010, AIG opted to not make and/or declare dividend payments to the Treasury for eight quarters, amounting to $7.9 billion in lost dividends to the U.S. Treasury. Instead, under the agreement with Treasury, AIG did not have to pay the missed dividends after four nonpayments. Instead, the U.S. Treasury could appoint approximately 20 percent of the firm’s board of directors.
Despite the above, the Treasury suggests that taxpayers may come out ahead from supporting AIG.
“Indeed, with the recent closing of American International Group Inc.’s (“AIG”) recapitalization plan, there is a chance that TARP may break even or possibly turn a profit on one of its most controversial transactions,” according to the SIGTARP report.
AIG’s 75 million warrants began to be traded in January 2011 with the intention of having current shareholders purchase the stock at a discount. On Sept. 26, 2010, AIG stock stood at $41.61.
Warrants allow the government to buy shares over a 10-year period at a fixed price called the strike price. If the strike price is above the stock price, the government will lose money, and if it is below the stock price, it will gain money.
The Hartford Financial Services Group Inc., among the largest U.S. life insurance and investment companies, received $3.4 billion in U.S. government TARP funds, of which it invested $3.2 billion in high quality short-term investments or money market funds.
Hartford repaid $3.4 billion in April 2010. In September 2010, the Treasury announced that it would auction the warrants it held from Hartford, in the form of common stock, as Hartford opted not to repurchase the warrants. The Treasury held 52 million warrants and expected a bid price of between $10.50 and $13.70. The Treasury proceeds amounted to $713.7 million. On January 26, Hartford stock stood at $28.08.
Next: Hartford’s warrants were auctioned through a Dutch auction.
Hartford’s warrants were auctioned through a Dutch auction. In a Dutch auction, the auctioneer starts out with the highest asking price and lowers it until someone will accept the price.
Lincoln National Corp., a life insurance company, received $950 million of taxpayer funds from the Treasury and repaid it in full in June 2010. The U.S. Treasury auctioned 13.5 million warrants for the purchase of common stock at a bid price ranging between
$13.50 and $16.60, resulting in auction proceeds of $216.6 million. On Jan. 26, Lincoln’s stock sold for $29.39/share.
Insurance in a Nutshell
There are 394,016 insurance companies in the U.S. at the end of January, according to the Manta website.
There are three types of insurance firms in the U.S.: life insurance, health insurance, and liability insurance, with the latter encompassing all types of insurance not covered by the first two categories
MetLife Inc. was ranked the largest company in terms of premium earnings in the American insurance sector, followed by State Farm Mutual Automobile Insurance Co. and Prudential Financial Inc., according to the Insurance Information Institute’s International Insurance 2010–2011 Fact Book. AIG ranked only 12th in the insurance industry in terms of premiums earned.
It should be noted that the statistical information in the International Insurance 2010–2011 Fact Book is based on numbers from 2008, and thus rankings might have changed.
The insurance sector is regulated by the states and not the federal government as generally believed. If insurance companies are in trouble, they are liquidated by the state insurance commission and don’t file for bankruptcy.
The McCarran-Ferguson Act, enacted in 1945, stipulates that state insurance laws supersede any law passed by the federal government. The Dodd-Frank Wall Street Reform and Consumer Protection Act established a Federal Insurance Office in the Department of the Treasury, with the right to monitor the insurance industry.
“States have the power to approve insurance rates; to periodically conduct financial examinations of insurers; to license companies, agents, and brokers; and to monitor and regulate claims handling,” according to a law review from Florida State University.
The state insurance regulator has broad legislative power and is either elected by the state or appointed by the governor of a state. The National Association of Insurance Commissioners (NAIC), a voluntary association, assists state regulators. NAIC members are elected or appointed by state government officials regulating the insurance industry. NAIC’s main function is to bring conformity to insurance regulations.
