Three life and health insurers have become financially “impaired” so far this year and more carriers are expected to follow, according to a report by A.M. Best.
The Oldwick, N.J.-based insurance rating firm considers a carrier “impaired” once a state insurance department takes its first official regulatory action against the company.
While impairment does not necessarily involve solvency, first-quarter earnings this year reflect the stress that carriers are experiencing from the crumbling economy, the report noted, leaving lower-rated, poorly-capitalized and heavily leveraged insurance companies open to financial impairment.
The report — “L/H Insurers Grow More Vulnerable to Financial Impairment Due to Losses” — spanned the years between 1976 and 2008, and suggested that plummeting stock prices either coincided with or preceded spikes in insurers’ financial impairments, which happened in 1983, 1991 and 1999.
Seven life and health carriers became impaired last year, so considering recent stock price trends, it is “reasonable” to expect a spike in financial impairments in the near term, according to the report.
A series of falling ratings also tends to precede actual impairments: In 2008, Best made 31 downgrades on life and annuity insurers’ financial strength versus eight upgrades that same year.
So far, the trend continues with 64 downgrades through April 2009 and three upgrades.
The three companies that have been financially impaired in 2009 are Roanoke, Va.-based Shenandoah Life Insurance Co.; American Network Insurance Co.; and its affiliate Penn Treaty Network America Insurance Co., both of Allentown, Pa.
The State Corporation Commission of Virginia took Shenandoah into rehabilitation in February due to impairments in the carrier’s investment portfolio and the fact that OneAmerica Financial Partners Inc. of Indianapolis dropped a bid to take over the battered carrier.
Shenandoah, a mutual company, lost about $50 million when its holdings of preferred stock in
Fannie Mae of Washington and
Freddie Mac of McLean, Va. plummeted in value following the government’s takeover of those two entities on Sept. 7.
By the end of that month, Shenandoah had racked up about $70 million in realized capital losses and a net loss of $61 million.
The Pennsylvania Insurance Department took Penn Treaty and American Network into rehabilitation in January after the companies lost their reinsurance letters of credit and the insurers’ surplus plummeted.
The carriers, which were bustling through the 1990s because they sold inexpensive long term care insurance products, were later hobbled by unexpectedly high benefit payments and low premium rate increases.
Last August, the companies had a dispute with their reinsurer, Imagine International Reinsurance Ltd. of Hamilton, Bermuda, which pulled back from its agreement to back a book of long term care policies written by the companies prior to 2002.
That book made up 81% of Penn Treaty and American Network’s business and was less profitable than their newer block of business, as it required hikes in reserves and premium rates.
