will insurance companies be relieved of financial pressure?

The recent adoption of mark to market accounting has put many insurance companies in dire straits. One executive i've talked with was concerned his firm would have to BK.

Recently the NAIC began discussions (this last weekend) to exempt insurers from mark to market accounting. This could be a signicant development.

What is mark to market accounting?
It's an accounting method that forces companies to value their investments at current market price.

Why is this good?
It prevents "phantom capital" from being kept on the books - imagine what a company would be worth if all it's capital were tied up in valueless Fannie May bonds?

What is it bad?
Not all companies trade their investments. Bonds retain their value if held to maturity (provided the bond issuer is solvent at that time). Many insurance companies have long term debt investments that are low in value now but were never intended to be redeamed before maturity - they can do this based on the long time between policy issuance and claims for certain types of insurance - such as life insurance.
however, if you discount the value of these bonds - even if their government bonds - the insurance company will look like it has less money available to pay claims.

Most property and casualty insurers are not at risk here, however, life companies are.

I would expect this issue to be addresses shortly.

Regards, makingourway

Banking thoughts...

I read an interesting article in the wall street journal comparing the current consolidation in the banking sector with much more gradual consolidation of Japan's banking sector after the collapse of it's real estate market in the 1990s.

The article seems dead on. The Federal Reserve is accelerating a banking consolidation that took much longer in japan.

It's interesting to note that Japan's consolidation cost $440B, while ours starts at $700B. I guess bigger economy, bigger costs.

I had always wondered how quickly our banking system would consolidate. For many years state and possibly Federal laws had made interstate banking difficult. With the gradual removal of those barriers banks like BofA began growing (and growing). however, the article notes that there are still thousands of small local banks and many mid-sized. The local presence is certainly a good thing.

I wonder though, do we need large nationwide banks to reduce the cost of interstate commerce and allow us to compete internationally?

Regards, makingourway