Life insurance companies fighting for their lives, too    Tom Shean  The Virginian-Pilot, Norfolk, Va.    McClatchy-Tribune Regional News

Mar. 2--Banks and stock brokerages aren't the only companies being whipsawed by turmoil in the financial markets.

Life insurance companies, which rely on investment income to make good on their policies, are under pressure, too. Several have been bruised by heavy losses on their holdings of commercial real estate, mortgage-backed securities and corporate debt.

Analysts have already signaled their concern by cutting ratings on some companies. Consumers need to understand the financial condition of insurers they do business with or from whom they might buy life insurance, said J. Robert Hunter, director of insurance at the Consumer Federation of America.

Hunter, a former insurance regulator, said he doesn't see the sort of widespread difficulty that bloodied the nation's life insurance industry during the 1990s. "I'd say most companies are in OK shape" because of the capital they built up before the financial markets went into a tailspin, he said.

Still, the number of troubled life insurers is on the rise. So far this year, three have been put into receivership by state regulators, compared with four during all of 2008 and two in 2007.

Virginia's insurance regulators recently took control of Roanoke-based Shenandoah Life Insurance Co. in an effort to protect its policyholders and creditors. Shenandoah's

financial strength suffered last year from $50 million in losses related to investments in the preferred stock of Fannie Mae and Freddie Mac, the state's Bureau of Insurance said. Shares of Fannie and Freddie plunged in value when the Treasury Department seized control of the two faltering mortgage-finance companies in September.

The most visible indicators of an insurer's financial health are the ratings issued by four rating agencies: A.M. Best Co., Fitch Ratings, Moody's Investors Service and Standard & Poor's. These are available from the agencies' Web sites and by phone.

"Look at what the rating agencies are saying," Hunter said. When buying insurance, "I would pick a company with very high ratings from all the rating agencies."

Other key sources of information about an insurer's heath are buried in the financial documents that the companies must file with the National Association of Insurance Commissioners.

Because of the data they include about an insurer's variable annuity business, the year-end statements filed with the regulators' organization are especially important, said Lynn Santimauro, a senior insurance analyst with Charlottesville-based research and publishing company SNL Financial.

Rating agencies have already expressed concern that some insurers may have difficulty making the minimum payments promised on their variable annuities. In contrast to the constant income paid by a conventional annuity, the income promised by a variable annuity is tied to an underlying portfolio of securities or a market index. Insurers typically guarantee the payments on their variable annuities even if the underlying investments' value plunges.

Insurers' year-end filings, which become available today, include other critical measures of financial health, including the amount of a company's risk-based capital. By weighing its capital against the risk in its investments and operations, each company comes up with a risk-based capital ratio -- a closely watched indicator of how large a cushion the insurer has against investment losses and other financial difficulties.

"As long as the ratio is over a certain threshold, regulators deem a company to be adequately capitalized," said George Hansen, managing senior financial analyst and actuary at A.M. Best Co., which specializes at rating insurance companies. Many of the nation's large life insurers currently have ratios between the high 300s and the mid-400s, which works out to a healthy 3.5 to 4 times the minimum amount of capital required by regulators, Hansen noted.

If its risk-based capital ratio drops below 200, regulators often ask a company to file a plan for improving its capital. And when the ratio sinks to 100, "that's when regulators step in," said SNL Financial's Santimauro.

However, the process of calculating the financial health of some life insurers is becoming more complicated. Battered by investment losses, the life insurance industry asked the National Association of Insurance Commissioners in November to ease some of the organization's requirements for measuring capital and surplus. After a hearing in January, regulators turned down the request.

In Connecticut and a handful of other states, insurance regulators responded by allowing certain companies to adopt more flexible accounting measures that boost the insurers' capital, surplus and risk-based capital ratios.

To accurately determine whether an insurer's financial health changed in 2008 from 2007 may require checking documents filed with New York State's insurance commissioner, Hunter said. Citing the need for consistency, the New York regulator recently told life insurers that adopted accounting practices allowed in other states that they also must file annual reports or supplements that adjust their assets, liabilities and surplus to New York's requirements.

Last week, Virginia's Bureau of Insurance notified companies licensed to do business in Virginia but based elsewhere that they must disclose any use of accounting practices that don't conform to the National Association of Insurance Commissioners' requirements. Any insurers that apply more flexible accounting standards also must describe what impact these changes had on their net income and surplus, the bureau said.

No Virginia-based insurers have sought permission from the Bureau of Insurance to adopt looser accounting practices, said Ken Schrad, the bureau's spokesman.