Mr. Nadel: Yes, I think that's exactly right. The forces have really been twofold in the life insurance sector in my view. They've been credit and the poor performance of the equity markets. So every company has had its piece of credit whether it came in the early stages in the form of the subprime residential mortgage-backed securities or if it's come more recently through the broad decline in valuations across every asset class, from corporates to commercial mortgage-backed securities and the ongoing pressure on residential mortgage-backed securities and other asset-backeds. Every company has had exposure there. And then you've got your variable annuity companies, which have had the double-whammy. The impact of credit on their general account investment portfolios and then the impact of the down equity markets both on the earnings off of their variable annuity businesses plus the incremental capital that they need to continue to put up against the variable annuity businesses as the guarantees go further and further in the money.
TWST: Randy, same question, how would you characterize what went on and what
drove things for 2008?
Mr. Binner: John certainly laid it out very well. We had identified credit as a
huge issue just over a year ago and have worked on it a lot this year by trying
to identify who had exposure to what risky assets and, more important, what we
thought the losses would be, and as you said, there were definitely stages of
it. I'd say that we all understood that it was a levered credit play in a lot of
ways with the average leverage of 7 times invested assets to equity. I believe
what you saw was that we all handicapped the credit exposures for what the
economy supported and then we got past this point maybe a few days after the GSE
bailouts in September, when things got a lot worse from a credit and stock
market perspective. After that, some of the more levered credit plays became un-
investable because the generally higher leverage no longer made the group
relatively well insulated, but relatively more exposed. I believe from that
point in time we've been one of the worst performing verticals in the overall
market.
In addition to credit, the deposit-based products and variable annuity
guarantees have obviously been the things that pop up when the S&P moves below
900. That is a particular problem for Hartford (HIG) and Lincoln (LNC), but also
for MetLife (MET) and Prudential Financial (PRU) to a lesser extent. But, at the
end of the day, it all comes back to credit because while the variable annuity
exposure may decrease earnings or hit your capital base, you still need that
capital base relative to the inevitable credit losses.
Finally, I'd add, the recession exposure of disability insurance products was
another area where investors have been cautious and are going to continue to be
cautious.
Tickers included in this excerpt: AIG, PRU, MET, AIZ, AFL, RGA, HIG, PFG, UNM, GNW, LNC, SFG, AZ
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