Seeking to assess the strength of the insurance carriers they do business with, many smaller independent broker-dealers — flummoxed by the insurers' opaque balance sheets and arcane accounting practices — are relying on a time-tested tool: their own observations.
Seeking to assess the strength of the insurance carriers they do business with, many smaller independent broker-dealers — flummoxed by the insurers' opaque balance sheets and arcane accounting practices — are relying on a time-tested tool: their own observations.
They have noticed with alarm a rash of recent departures by insurance wholesalers, either due to the elimination of their jobs or through voluntary resignations, from some major carriers, including John Hancock Financial Services Inc. of Boston and The Hartford (Conn.) Financial Services Group.
"I don't look kindly on companies that take out their wholesalers in a time like this. We could no longer do business with them if I didn't have the support right now when I need it the most for our people," said Thomasina Michalik, managing director at Vanderbilt Securities LLC, a Melville, N.Y.-based independent broker-dealer.
"The problem with laying off wholesalers is that you're cutting back on your seed corn," said Jonathan Henschen, president of Henschen & Associates LLC, a recruitment firm in Marine on St. Croix, Minn. "If you cut back on wholesalers, you cut back on your relationships with broker-dealers who give you business."
Variable annuity wholesalers who have parted ways with their carriers said the product has become much harder to sell now that insurers have pulled back on attractive product features.
"Lots of firms write the business and the guarantees, but with the de-risking, they don't want to compete for a while," said a wholesaler who recently left a major carrier and asked not to be identified. "You'll start to see wholesalers looking for alternative companies that are in much healthier shape and have products that are more competitive."
For their part, broker-dealers are reading the departure of veteran wholesalers as a loss of confidence among a group that may know what's really going on at the home office.
"These are ethical guys, and they don't want to shill for something that isn't what they say it is," said a brokerage firm executive who asked not to be identified.
Another warning sign, according to another broker-dealer executive who asked not to be identified, is the state of balance sheet health at other financial companies.
"We think insurers have some toxic assets; they're all over, so why wouldn't insurance companies have them?" the executive said. "Insurers' toxic assets are just as toxic as Bank of America's."
Several large variable annuity providers have sought regulatory approval to change their accounting methods, permitting them to raise statutory capital, their capital surplus and their risk-based-capital ratio.
These attempts at regulatory relief largely have escaped the attention of the brokerage community and the general public, but among broker-dealers that are aware of the insurers' efforts, there is just as much uncertainty about the meaning of the changes as there is among insurance analysts, ratings agencies, regulators and insurance watchdogs.
"Reserve requirements are there for a reason," said Tim Morton, vice president of development at WBB Securities LLC in San Diego. "There are other companies that aren't asking for changes, and they have decent rates"
"We have to dig through the details, but you get a lot of minutiae," he said. "Most firms aren't doing that type of due diligence."
Others, such as Scott Stolz, president of Planning Corporation of America, the insurance general agency of Raymond James and Associates Inc. in St. Petersburg, Fla., said they aren't reassessing their carriers but are stepping up communications with advisers and analysts.
Raymond James also is having conversations with insurers, and Mr. Stolz subscribes to an informal network in which broker-dealers share news reports and analysts' comments on insurers.
"You grab the info wherever you can find it," he said. "Traditional sources are too slow, and if you wait for rating agencies, you're too late."
Other broker-dealers admit that even the most careful due diligence may not avert a problem.
"The industry isn't unaware that there may be a black swan circling about, and if you're smart, you'll stay away from it," said Ron J. Kovack, chief executive of Kovack Securities Inc. in Fort Lauderdale, Fla. "It's an area we're studying to find the best way to protect and serve the customer; we pay a lot more attention to the individual name of the company."
Consumer advocates urge that brokerage firms and advisers remain vigilant in monitoring carriers' applications for capital relief.
"The balance sheet remains important, and insurers with extra cushions of [real] capital are preferred," Bob Hunter, director of insurance at the Washington-based Consumer Federation of America, wrote in an e-mail. "Advisers have to be aware of any insurer's use of permitted practices and adjust for that."
Carriers that have applied for more-lenient capital standards include Principal Life Insurance Co., Aviva Life and Annuity Co., and ING USA Annuity and Life Insurance Co., as well as The Hartford and Allstate Insurance Co.
E-mail Darla Mercado at dmercado@investmentnews.com.
