ACE Limited announced that it is “providing further detail to help clarify ACE’s total exposures to potential loss related to its variable annuity reinsurance business. The clarification supplements a Form 10-Q that the company filed with the SEC on November 7, 2008.”
ACE noted that the 10-Q form it filed “said its Net Amount at Risk (NAR) associated with its variable annuity death benefit reinsurance was $6.5 billion at September 30, 2008. It is important to note that NAR is not a measurement of risk but rather a metric used in the life insurance industry to indicate total exposure if all covered individuals were to die immediately with account values fixed at current market levels.
“Such a scenario is obviously extremely unlikely and no company assumes this event will ever happen. In addition, this metric does not include any offset for current reserves held or for future premiums or for discounting – again, because the assumption is the simultaneous deaths of all lives covered in the program. While this metric has value in undertaking relative comparisons, as well as other technical applications, it is not relevant to a real world understanding of ACE’s variable annuity reinsurance business.”
Chairman and CEO Evan G. Greenberg added: “Using the NAR as a measure of risk is like deciding that the world is literally ending tomorrow. It is essentially measuring insurance risk solely by adding together all of the limits of all policies issued and then assuming that every one must be paid at once. It is, frankly, completely incompatible with the nature of the insurance business and with reality as we know it.”
The Company said that a “more appropriate way of evaluating the risk associated with the company’s variable annuity reinsurance business is to understand the reserves that have been posted as well as the sensitivities of those reserves to changes in market conditions. The company recorded the level of those reserves and sensitivities in the 10-Q.
“The company also disclosed expected premiums and claims payments for this line of business for the next 12 months. This disclosure clearly indicates that the variable annuity reinsurance business has no cash flow or liquidity concerns. Based on market conditions as of September 30, 2008, the company expects to earn between $150 million and $200 million in operating income on this line of business in 2009.
“Even under current market conditions, the company would expect to generate reasonable operating income on this line of business for 2009. As a reminder, substantial premiums will continue into the future and reserves are established to offset future losses. As a result, an increase in claims paid does not translate directly into a reduction in income.”
ACE pointed out that there are “distinct differences between the company’s position as a reinsurer and that of a direct writer of variable annuities,” which it detailed as follows:
— ACE does not reinsure the “base contract” for any of its variable annuity guarantee reinsurance clients. ACE does not have any deferred acquisition cost (DAC) exposure to falling equity markets or account values nor does it have DAC exposure to increasing policyholder lapses.
— ACE’s premiums for almost all variable annuity guarantee reinsurance treaties do not fall as equity markets and account values fall. For these treaties the run rate of premiums will only be reduced for policyholder lapses and deaths.
— ACE includes claim limits on all variable annuity guarantee reinsurance contracts. The exact limits vary by contract and examples of typical contract provisions were provided in the 10-Q. With some minor exceptions, claims in excess of annual limits do not carry over to future years.
As a final point, the company stressed that it “did not stop writing this business in 2007 because of a concern that it was under-priced. The decision was based on the company’s risk management judgment that it had sufficient aggregate exposure to this long-tail catastrophe line of business.”
Source: ACE Group – www.acelimited.com.
Topics Reinsurance
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