Insurer Losses Trigger Most Regulator Intervention in a Decade

Photographer: Ramin Talaie/Bloomberg

Robert Henrikson, chief executive officer of Metlife Inc., speaks at a forum in New York. Close

Robert Henrikson, chief executive officer of Metlife Inc., speaks at a forum in New York.

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Photographer: Ramin Talaie/Bloomberg

Robert Henrikson, chief executive officer of Metlife Inc., speaks at a forum in New York.

U.S. life and health insurers were subjected to regulatory intervention last year at the fastest pace in a decade as they lost money on investments and promised more to clients than they could deliver.

The industry “has yet to fully shake off some of the lingering effects of the financial crisis,” Carole Ann King and Joe Niedzielski, analysts with insurance company ratings firm A.M. Best, said in a report released today. Twelve insurers were targeted for regulatory action last year, the most since 1999 when 24 carriers were deemed impaired. The number will probably rise this year, A.M. Best said.

The biggest life insurers, led by MetLife Inc. and No. 2 Prudential Financial Inc., reported quarterly losses exceeding $1 billion during the credit crisis. Investments soured during the recession and guarantees made to policyholders weighed on results when stock markets declined. Even after profits returned to many carriers last year, Fitch Ratings warned of losses to come on commercial mortgages.

“A.M. Best remains concerned with the industry’s exposure to certain asset classes such as residential and commercial real estate,” King and Niedzielski said.

State insurance regulators are responsible for monitoring carriers’ finances and ensuring companies have enough money to satisfy policyholder claims. The watchdogs are backed up by state guaranty funds, which are supported by solvent insurers and pay claims when regulated carriers can’t meet obligations.

Monitoring Insurers

“We are monitoring life and health insurers more closely than in the past,” said Jerry Hagins, a spokesman for the Texas Department of Insurance. “Life and health in particular, because of the type of assets they hold, tend to be more impacted by decline in investment markets.”

The Texas watchdog got an order of liquidation in June 2009 for Texas Memorial Life Insurance Co., a funeral benefit carrier.

Penn Treaty Network America Insurance Co., the provider of long-term care coverage for 120,000 customers, faced declining capital last year because it didn’t charge enough for policies sold in the 1990s, A.M. Best said. On Oct. 2, Pennsylvania Insurance Commissioner Joel Ario sought the firm’s liquidation. Penn Treaty may need more than $1 billion in additional funds to pay claims, Ario’s office said in the Oct. 2 request.

Sellers of long-term care coverage, including Penn Treaty, suffered after underestimating expenses, while the broader life insurance industry reported losses after their forecasts for stock-market appreciation proved too optimistic. Hartford Financial Services Group Inc. and Lincoln National Corp. needed U.S. bailouts last year after losses tied to promises of minimum return on equity-based variable annuity retirement accounts.

Shenandoah

Shenandoah Life Insurance Co. was brought under the control of the Virginia watchdog, which announced plans to sell the company’s group business to Assurant Inc. Shenandoah was seized after losing about $50 million on investments in mortgage- finance firms Fannie Mae and Freddie Mac. Shenandoah had assets of $1.6 billion at the end of 2008, A.M. Best said.

“State law requires that we protect policyholders by taking over an insurer when its finances weaken to a point where further deterioration may lead to claims not being paid,” California Insurance Commissioner Steve Poizner said in a February statement on Golden State Mutual Life Insurance Co. The regulator was appointed conservator of Golden State in 2009 after the company failed to post an operating profit for six straight years, A.M. Best said.

Life and health insurers reported net income of $21.3 billion last year, compared with a loss of almost $53 billion in 2008 as investment writedowns narrowed, A.M. Best said.

Largest Insurers

MetLife, led by Chief Executive Officer Robert Henrikson, shunned federal aid and instead pressed state regulators to lower capital requirements. Neither New York-based MetLife nor Prudential of Newark, New Jersey, was cited in the A.M. Best report. Hartford, based in the Connecticut city of the same name, and Philadelphia-based Lincoln were also excluded from the report. Both firms repaid their U.S. aid this year.

U.S. insurers got about $7 billion of capital relief last year from regulators on investments in residential mortgage- backed securities, according to the National Association of Insurance Commissioners. At a September hearing, Eric Steigerwalt, head of finance at MetLife’s U.S. business, told regulators that capital requirements protecting against RMBS losses were “material, and in some cases excessive.”

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

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