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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (44056)	8/25/2011 11:38:56 AM
From: Spekulatius	1 Recommendation Read Replies (2) \| Respond to of 78661

re HIG and life insurers. I looked into this sector quite a bit. As I mentioned before - i have a few concerns, some general and some specific to HIG. 1) I know that HIG came under pressure in 2008/2009 because of equity based annuity with a guaranteed payout floor. This become very problematic when the equity indices went down a lot and of course HIG did not have adequately hedged themselves, so they were on the hook with annuities sold before. I also know is that the have increased their hedges but i am not sure it is sufficient - or if they just got lucky that equity indices recovered before this become a problem. 2) the book value in most US based lifeinsurers is of low quality as I see it. For example HIG has a 21B$ book value but on the asset side they have 9.5B$ deferred acquisition costs (which means basically that they activate the cost of the sales commission for life insurance contracts - in some cases the deferred acquisition cost exceeds the even the sales commission basically claiming that once a insurance is sold it is worth more than the cost to sell it!). this is very aggressive accounting (accrual accounting) and I also noticed that comparable insurance companies in Europe do not seem to have as much deferred acquisition cost as a percentage of equity (more typical <20% of equity). MET (which is seen as a gold standard for US life insurers) has the same issue - almost - the deferred acquisition asset is equivalent to almost 50% of the equity. 3) Extended low interest rates could be a big problem. The basic issue is that they have some contracts that have a minimum implied return that may be higher than what can be achieved using low risk bonds in the future. This was a big problem for life insurers in Japan when interest rates went to zero - some apparently went belly up because of this. I looked for disclaimers and it seems that 2011 is not a problem but MET for example states that it could be a problem in the future. I do not know how to quantify this issue - I think there is a chance that this will become a huge issue in 2012 if indeed Bernanke states that the interest rates stay close to zero for an extended time. How is an life insurer going to get any return in such and environment unless they decide to go into equities (which is risky given their leverage). Anyways those are my thought, I don't claim to have specific knowledge.