March 20, 2023

MetLife Will Repatriate an Offshore Reinsurance Unit

For a number of years, MetLife has been using a Bermuda subsidiary, Exeter Reassurance, to reinsure several billion dollars’ worth of variable annuity contracts, in which customers pay in advance to receive guaranteed payments in retirement. By buying the reinsurance, MetLife was able to remove the obligations to these policyholders from its balance sheet.

Such transactions have become extremely popular in the life-insurance business in recent years, and regulators at the New York State Department of Financial Services have been investigating the deals since last July. The department’s superintendent, Benjamin M. Lawsky, recently called them “financial alchemy.”

“Let’s call it shadow insurance,” Mr. Lawsky said in a speech in April, recalling the so-called shadow banking system that appeared in the run-up to the financial crisis.

MetLife and other insurers have been trying to cope with the Federal Reserve’s long-running policy of keeping interest rates very low to help revive economic growth. Many life insurers are having trouble because they normally buy bonds to make good on annuities they sold in the past, and they cannot get the yields they need in the current low-rate environment. They can reduce the obligations on their balance sheets, however, by shifting them to reinsurers.

But buying reinsurance from an off-balance-sheet subsidiary “does not actually transfer the risk for those insurance policies off the parent company’s books,” Mr. Lawsky said in his speech. By law, reinsurance must involve a real transfer of risk; otherwise insurers are not supposed to use it to improve their balance sheets.

Mr. Lawsky said questionable reinsurance deals throughout the industry were increasing the likelihood that policyholders would not receive their payments at some point. He also expressed concern that they were causing systemic risk within the broader economy, the way the booming growth of mortgage-backed securities had done in the years before 2008.

MetLife’s chief executive, Steven A. Kandarian, said in an annual presentation to investors on Tuesday that repatriating MetLife’s policy obligations from Exeter “proactively addresses recent regulatory concerns” about such deals, adding that Mr. Lawsky’s inquiry had been an important factor. He also said the change would put MetLife in a better position to comply with new collateral requirements put in place by Congress after the financial crisis.

Mr. Lawsky issued a statement on Tuesday praising MetLife’s decision, saying the company had “acted wisely in bringing this subsidiary back to the United States, where it will be subject to stronger rules and oversight.”

MetLife said the transaction, which it expects to complete next year, was also part of an effort to lower the risk of its variable annuities business. It also said it was ratcheting back on sales of the annuities, aiming for $10 billion to $11 billion worth this year, compared with $28.4 billion in 2011.

MetLife’s shares closed down 1 percent, or 48 cents, to $42.82.

When MetLife’s transaction is complete, it will have returned Exeter to the United States and merged it with three state-regulated MetLife units: the MetLife Insurance Company of Connecticut; the MetLife Investors U.S.A. Insurance Company, now based in Delaware; and the MetLife Investors Insurance Company, based in Missouri. A spokesman said it was not yet clear where the merged company would be based.

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Bucks Blog: A Refresher on Hurricane Deductibles and Flood Coverage

A man in New York City sweeps water out of his apartment after Hurricane Sandy.Getty ImagesA man sweeps water out of his New York apartment after Hurricane Sandy.

If you were affected by the wrath of Hurricane Irene last year you may already know this, but it bears review in the wake of Hurricane Sandy: Damage caused by surging storm water generally isn’t covered by your homeowner’s or renter’s insurance policy.

Rather, you’ll only have coverage if you purchased a separate flood insurance policy, either from the National Flood Insurance Program or a handful of private firms.

The national flood policy covers damage for up to $250,000 to the structure of your home, and $100,000 for personal possessions. Note that the N.F.I.P. policy provides “replacement” cost coverage for the structure, but only “actual cash value” coverage for your belongings.

Damage from wind, however, is covered by homeowner’s insurance policies — but it’s likely to be subject to a special “hurricane deductible,” which is different from the policy’s standard deductible. Coastal states from Maine to Texas have special rules for hurricanes, put in place to limit insurance losses after catastrophic storms. Details vary, but in general when a hurricane (or, in some cases, a named storm) is declared by the National Weather Service, special hurricane deductibles apply for resulting damage.

The standard deductible is usually a flat amount — $500 or $1,000, for instance. But hurricane deductibles are generally a percentage of the home’s insured value and usually run from 1 to 5 percent. So, for instance, if a home is valued at $300,000, the deductible could be as high as $15,000.

Please let us know what conversations you’ve had with your insurance companies so far in the wake of Hurricane Sandy.


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Bucks Blog: Do You Have a Hurricane Deductible?

An uprooted tree rests on a house as Hurricane Isaac passes through New Orleans.ReutersAn tree uprooted by Hurricane Isaac rests on a house in New Orleans.

Many homeowners in Louisiana who were affected by Hurricane Isaac are probably getting familiar with an aspect of their insurance policies known as a hurricane deductible.

Deductibles are the portion of damage the homeowner pays out of pocket before insurance kicks in. For most “perils,” as the industry calls them, the standard deductible is a flat amount — say, $500 or $1,000. But coastal states from Maine to Texas have special rules for hurricanes, put in place to limit insurance losses after catastrophic storms.

Details vary from state to state, and from insurer to insurer. But generally, when a hurricane (or, in some cases, a named storm) is declared by the National Weather Service, special hurricane deductibles apply for resulting damage. Such deductibles are generally a percentage of the home’s insured value, and usually run from 1 to 5 percent. So, for instance, if a home is valued at $300,000, the deductible could be as high as $15,000.

In some areas, homeowners can buy extra coverage — that is, lower their deductible — in exchange for paying higher premiums; some high-risk areas don’t offer this option, however, according to the Insurance Information Institute, an industry group.

The institute lists details of hurricane deductibles by state on its Web site.

Hurricane coverage in standard insurance policies generally covers wind damage — both to the home, and to personal belongings — since many items become projectiles during hurricanes. “If its wind, it’s covered — but if it meets hurricane criteria, it’s a different deductible,” says Jeanne Salvatore, a spokeswoman for the institute.

Flood damage, however, is covered only if you purchase special flood insurance — generally, from the National Flood Insurance Program, or from some private companies.

Blythe Lamonica, spokeswoman for the Gulf State Insurance Information Center in Baton Rouge, La., said hurricane deductibles apply for damage from Hurricane Isaac in Louisiana. The nonprofit organization, which provides consumers information about insurance in Louisiana, has urged homeowners to review their policies before hurricane season to make sure they know their coverage, she said. Generally, insurers in the state must make the section on hurricane deductibles prominent in written policies, she said, such as by using large type or bold print.

While such deductibles apply, they can be enforced only once a given year. So if a second hurricane were to hit, standard deductibles would apply, she said.

Have you had to pay for a hurricane deductible? How much did it cost you?

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Wealth Matters: How to Handle Force-Placed Insurance

I was one of those homeowners, and I wrote a column last year about how difficult it was to get this type of insurance removed. I was reminded of that column when I read a colleague’s article about New York State investigating banks for making homeowners buy this overpriced insurance.

While lenders have every right to make sure that the homes on which they hold mortgages are adequately insured, borrowers have complained about the exponentially higher rates and how difficult it is to have the charges removed. When homeowners do not pay the charges or show proof of their own insurance, the penalties mount quickly. While there are no numbers on how many force-placed insurance policies have been put into effect, experts say they believe that the practice has become more common in the last couple of years.

One of the practices that has gotten regulators’ attention has been the mortgage lenders’ use of insurance subsidiaries to buy the force-placed coverage. But even when the lenders’ subsidiaries are not used, the way this insurance is applied has still irritated homeowners.

The mortgage industry argues that the insurance is more costly because it is being bought by the insurance companies that underwrite these policies, and that those companies have no knowledge of the homeowner’s credit score, which affects the cost. The lenders also say the practice is necessary to protect their shareholders’ interests.

“The objective here is to protect the interest of the lender,” said Vik Jain, managing director of Wingspan Insurance Services, which alerts banks when insurance lapses on the mortgages it monitors. “The only way to do that is to force-place that coverage. The lender cannot just call State Farm and renew the policy.”

That is certainly true. But banks often outsource this work to vendors that don’t always communicate with each other. While his company tracks loans and alerts the banks, Mr. Jain said, other servicing companies notify the customers that they do not have insurance and actually buy the insurance for the property. Since these servicing companies profit from the sale of the insurance, they are the ones that lose money if homeowners succeed in having the force-placed insurance removed from their accounts.

While there are at least a half-dozen pending class-action suits against banks over force-placed insurance practices, relief for consumers is slow in coming and is unlikely to cover all the charges homeowners have incurred.

Kai Richter, a lawyer at Nichols Kaster, an employment and consumer rights law firm in Minneapolis, said his firm recently won a $9.65 million class-action suit, Hofstetter v. Chase Home Finance. In that case, Chase had to stop both taking commissions from selling force-placed insurance and requiring insurance above the loan balances. But the only customers who won relief were the 40,000 who were part of the suit, and even then, Mr. Richter said, the award was only enough to refund about two-thirds of their money.

Suits like this may prevail and states like New York may succeed in wringing more concessions from banks. But such resolutions take time. What are homeowners doing today as they battle banks’ force-placed insurance, and what should you do if you find yourself in a similar situation?

PAY UP The sad truth is that most homeowners will give up before they win a battle against a bank, particularly one that holds the mortgage on their home. Homeowners are at a disadvantage, even if they believe they are right.

“When you fight the mortgage company, the mortgage company is going to hold all the cards,” said Keith Crocker, professor of insurance and risk management at Pennsylvania State University who won his own battle over force-placed insurance against Wells Fargo. “If they say you need it, you’ve got to go get it so they don’t force-place with even more expensive coverage. Then you fight them on it.”

If this seems to be capitulating, it is. But doing so saves time and may prevent you from falling into the labyrinth of unanswered messages, lost paperwork and mounting fees.

DON’T IGNORE IT The initial letters from many banks about the need for insurance are computer-generated and easy to ignore. Homeowners may think they already have the coverage or do not need what is suggested. That may be true, but not making that clear to the bank has serious ramifications.

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Setback for Bank of America in MBIA Lawsuit

Justice Eileen Bransten of the New York State Supreme Court ruled that to show fraud, MBIA need only show that Countrywide had misled it about the $20 billion of securities that it insured, not that the misrepresentations caused its losses.

MBIA accused Countrywide of misrepresenting the quality of underwriting for about 368,000 loans that backed 15 financings from 2005 to 2007, while the housing market was booming. It said it would not have insured the securities on the agreed-upon terms had it known how the loans were made.

“No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy,” Justice Bransten wrote, citing New York common law and insurance law.

While not ruling on the merits of the case, the judge lowered the burden of proof on MBIA to show Countrywide had committed fraud and breached the insurance contracts.

She also said MBIA could seek damages for its losses, rejecting Countrywide’s argument that the insurer’s only remedy was to void its insurance policies. MBIA had said that would be unfair to investors.

Manal Mehta, a partner at Branch Hill Capital, a hedge fund in San Francisco, said Bank of America had lost “one of its key defenses in the ongoing litigation over mortgage putbacks by the monoline insurers.”

Neither Bank of America nor MBIA officials were immediately available to comment.

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DealBook: From Spain to Britain, Bank Earnings Slip in Europe

Three of the four major European banks that reported first-quarter earnings on Thursday performed weaker than had been expected as a result of recent market turmoil and the slow economic recovery in countries including Britain and Spain.

Lloyds Banking Group, the partially nationalized British bank, posted a net loss of £2.43 billion ($4 billion) for the period, the result of a £3.2 billion charge for potential compensation related to a court case involving insurance policies sold to bank customers. During the period a year earlier, Lloyds had posted a profit of £204 million.

Lloyds also blamed “continued economic and regulatory uncertainty” and said “sentiment and economic performance is being affected by concerns over austerity measures and cost inflation, and by global factors including instability in the Middle East and North Africa, and natural disasters such as in Japan and New Zealand.”

The bank said it had been focusing on further reducing its risky assets, and that it had delivered a “satisfactory trading performance” given the backdrop. Its core Tier 1 ratio, a measure of financial strength, stood at 10 percent, down from 10.2 percent in the fourth quarter.

The provision follows a British court decision last month that barred lenders from appealing a decision requiring them to compensate consumers for selling unnecessary loan insurance policies, which typically cover sickness or unemployment, and being told it was compulsory when it was not. Customers also were regularly not told the full details of the policies.

Other British banks like Barclays and Royal Bank of Scotland are also expected to make related payments, and the Financial Services Authority has estimated total claims at £4.5 billion.

At Lloyds, provisions related to the Irish economy, which is being supported by the International Monetary Fund and Dublin’s European partners, also contributed to the loss.

“Lloyds has not traditionally been able to benefit from the international diversification of some of its rivals and where it has, such as in Ireland, it has been forced to make further write-downs,” said Richard J. Hunter, head of British equities at Hargreaves Lansdown in London.

The British government holds 41 percent of Lloyds, acquired during the financial crisis. It also retains 84 percent of R.B.S. The government is not expected to sell any of its stakes until September at the earliest.

The scale of the provisions was unexpected and sent the company’s share price down 8.5 percent, to 53.09 pence. Other London-listed banks also suffered.


One of the largest Spanish banks, BBVA, said its first-quarter net income dropped 7.3 percent, to 1.15 billion euros ($1.7 billion) as a weak business climate in Spain offset improvements in Mexico. Despite the profit decline, the lender said the first-quarter performance was its best in the last three quarters.

“The resilience of our earnings is based on an adequate diversification and on a successful business model,” said Ángel Cano, BBVA’s president and chief operating office. “Emerging markets will continue to play a growing role in the group’s earnings.”

The bank said bad loans, as a proportion of the bank’s overall lending, had dipped to 4.1 from 4.3 percent in the period a year earlier, adding that it was the fifth quarter in a row in which the nonperforming assets ratio remained in check.

An aggregate index of Spanish real estate prices, compiled by Barclays Capital, showed home prices down 0.8 percent in April from a month earlier, and 4.7 percent lower from the period a year earlier. That represented the sharpest pace of annual decrease since March 2010.

“We expect a further decline of potentially around 20 percent from here,” the Barclays analysts Julian Callow and Antonio Garcia Pascual said.

Société Générale

Société Générale, one of the largest banks in France, said its net profit for the quarter was 916 million euros, down almost 14 percent from the period a year earlier. It booked a charge of 239 million euros on its own debt and saw business disrupted with the political turmoil in the Arab world.

Own-debt charges have been common this earnings season as banks, which marked down their liabilities as their debt declined in value during the crisis, have had to mark that debt back up as their creditworthiness recovers.

The bank said net income at its international operations had fallen 61 percent, to 44 million euros, as performance was affected by “the economic consequences of the political transition situations experienced in Egypt, Tunisia” and Ivory Coast.

Independent of the protests that swept North Africa this year, Ivory Coast was riven by civil strife between the forces of former President Laurent Gbagbo, now ousted, and a newly elected government. Société Générale and other international banks closed their operations in the country in February.

Shares in BNP Paribas, another large French bank, rose 1.1 percent in Paris. On Wednesday it said its first-quarter net income rose to 2.62 billion euros, beating the estimate of analysts.


ING, the Dutch financial services company bailed out during the crisis, was the one bright spot in the earnings reported on Thursday, posting profit of 1.38 billion euros for the quarter, up 12.3 percent from the period a year earlier.

The bank said it had drawn more deposits, lowered risk provisions, cut costs and kept a “healthy interest margin.” Its insurance benefited from higher fees, more sales and returns on its investments, it said.

The bank reiterated its intention to repay 2 billion euros of state aid next week, a transaction that will cost it 3 billion euros because of a 50 percent repurchase premium. ING is also preparing to split its banking and insurance businesses, which was a condition of receiving the government bailout.

“The restructuring of the group is on track,” Jan Hommen, chief executive of the bank, said in the statement. “We are laying the groundwork this year for two I.P.O.’s of our U.S. and European and Asian insurance businesses.”

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Economix: The Economics of Privately Sponsored Social Insurance

Today's Economist

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

On March 23, Senator Ron Johnson, Republican of Wisconsin, marked the first anniversary of President Obama’s signing into law of the Affordable Care Act of 2010 by publishing a commentary in The Wall Street Journal, “ObamaCare and Carey’s Heart.”

He began with a touching celebration of the life-saving operation that had been performed some 27 years ago by highly skilled surgeons on the senator’s young daughter, who was born with a serious heart defect. He noted that this undoubtedly expensive operation had been financed by a “run-of-the-mill plan available to every employee of an Oshkosh, Wis., plastics plant.”

His commentary suggests that he views this “free market” approach to financing health care as the foundation of our health system’s remarkable innovations and achievements.

Senator Johnson’s commentary then veered into a sharp broadside aimed at the Affordable Care Act of 2010:

I don’t even want to think what might have happened if she had been born at a time and place where government defined the limits for most insurance policies and set precedents on what would be covered. Would the life-saving procedures that saved her have been deemed cost-effective by policy makers deciding where to spend increasingly scarce tax dollars?

Not surprisingly, this comment elicited much critical commentary, some of it needlessly vehement.

I do not wish to join that a vituperative chorus, because there is much I admire in the senator. He worked hard in his youth to put himself through the University of Minnesota and studied at night for a master’s of business administration, and he eventually risked his own money and used his vision and even harder work as an entrepreneur to please customers worldwide and, in the process, create a good livelihood for his family and for his employees. I look up to such entrepreneurs. We all should.

Even so, I am puzzled about why the senator does not see in the Affordable Care Act a sincere attempt to replicate his family’s fine health care experience for millions of low-income, uninsured Americans.

The idea is to help those with family incomes above 133 percent of the federal poverty level (currently about $30,000 for a family of four) procure — on an organized state- or federally run health-insurance exchange — community-rated, publicly subsidized, private health insurance of the sort that financed his daughter’s cure.

A government-run health insurance exchange is not such a novel idea, nor should it be controversial. The federal government’s Office of Personnel Management has for decades run such an exchange for every member of Congress and for federal employees, and very successfully, by all accounts.

To see why the Affordable Care Act is actually trying to mimic employment-based private health insurance, let me propose this definition: Employment-based group health insurance, American style, is publicly subsidized, privately sponsored, community-rated social insurance sold to American employees on formally organized health insurance exchanges.

Let me explain how I come to this definition.

First, economists are virtually unanimous that the bulk of the cost of fringe benefits –- including health insurance –- that is ostensibly covered by an employer is actually taken out of the paychecks of employees collectively, if not year by year then in the long run. Exactly what fraction of the cost is shifted back to employees in this way depends on a number of factors.

As I jokingly put it to my students, employee-benefit managers, basically kindly social workers camouflaged in business attire, are similar to pickpockets who take money out of your paychecks and then use it to buy you health insurance, for which you thank them profusely.

In other words, the employees actually pay most or the full premiums for their employment-based health insurance, even if they do not make an overt contribution toward the insurance premium.

Second, to assist employees in making this purchase, the benefit managers organize a formal health-insurance exchange that lists a side-by-side comparison of the different insurers among which employees can choose.

While there are some variations in the benefit packages offered by the various insurance companies on the list, the packages are typically dictated by the employee-benefit department, which also selects the health insurance plans permitted to list themselves on the exchange (and those that are not) and tightly regulates these companies’ behavior during and after the enrollment period.

Of course, smaller companies usually list fewer and sometimes only one or two insurers on their exchanges. Part of the intent of the Affordable Care Act is to offer these small employers access to the larger state-run exchanges, so their employees have more choices among insurers.

Third, the contributions employees make directly toward the premium for health insurance (through explicit deduction from their paychecks), plus their indirect contribution through reductions in take-home pay, are effectively community rated. This means healthier employees are forced to subsidize through their premiums the health care of sicker employees by effectively paying the same premiums.

Consider two workers performing the same work in a company, one healthy and the other chronically sick. They will make the same direct contribution to the identical insurance policy and receive the same take-home pay.

In other words, the idea that raised so many hackles last year — that younger, healthier Americans should, through community-rated health-insurance premiums, subsidize sicker Americans — has long been accepted by the bulk of Americans at their place of work.

In this sense, then, private employment-based group insurance qualifies for the label of “social insurance,” even though it is privately sponsored. It is, of course, not socialized medicine, but neither are the Medicare, Medicaid and Tricare programs, government-sponsored social insurance programs that procure health care from the private sector.

Only the program that Americans reserve for military veterans, and apparently preferred by them — the vast Veterans Administration Health System — is pure socialized medicine.

Finally, Americans who procure health insurance at their place of work receive generous public subsidies toward that purchase, and higher-income earners receive larger subsidies than lower-income earners. This is so because the contributions employers make toward the group health-insurance premiums of their employees are tax-deductible business expenses, but not taxable compensation to the employee — even though it is a form of compensation.

Estimates of the total dollar amount of that subsidy range between $200 billion and $300 billion a year, depending on what taxes are included in the analysis – only federal income taxes, or also payroll taxes, or also state income taxes, if any. Estimates consistently show that high-income earners receive the bulk of that public subsidy.

The current amount of that subsidy is estimated at around $200 billion a year, although some estimates go higher, depending on what taxes are included in the analysis –- only federal income taxes, or also payroll taxes, or also state income taxes, if any.

Estimates consistently show that high-income earners in high marginal tax brackets receive the bulk of that public subsidy.

Having said all this, I ask you to imagine a low-income family whose head or heads of household work at very low wages in small companies that do not offer their employees health insurance, which is the case at many small companies. Suppose their little daughter was born with exactly the same condition as was Senator Johnson’s daughter. What should the fate of that little girl be?

Perhaps the senator could provide some commentary on that, as well.

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