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NALC
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NALC 2004 Fall Conference Report
Thursday, September 30Commissioners Panel
2004 Elections
Friday, October 1Do You Know What Your Company’s Actuary is Doing?
Cory began by enlightening the audience with a brief history of how the actuary has evolved from a mathematician who calculated insurance premiums in the 18th century to a profession described as one of financial engineers who assist with the quantification and understanding of risks in financial services industry. The complexity of newer life and annuity products that the industry is demanding requires more complex financial models than 20 years ago which fit the actuaries background.
-Product pricing, targeting profitable segments of business. Annual Statement Updates
The Blanks Working Group, the group given primary responsibility of overseeing the annual statement reporting formats and the annual statement instructions, has also changed their working format. The group now meets quarterly to consider, expose for comment, and adopt changes. This process is resulting in more last minute implementation of changes by the NAIC, which will ultimately lead to a high level of frustration on the company level. In addition, since the process has been accelerated, more changes are being implemented with errors and/or incomplete instructions, resulting in further correction work.
Economical and Credit Market Update
The Economy
Still, the view from the Fed is that we are going through a soft patch, and stronger growth is around the corner. The recent 25bp increase in the Fed Funds rate to 1.75% and the statement that measured increases will continue, demonstrates this conviction.
Nearer term, we expect the economy to remain somewhat soft as oil prices continue to negatively impact consumer spending and lead business to slow down expansion plans. A further wild card is housing prices. Some areas of the country have experienced such a rapid increase over the past few years that should prices soften, consumers may be inclined to pull back further. With this slow growth recovery, we expect core inflation to remain well under control and likely to remain in the 2% range. The Markets
Fixed Income Market: With inflation remaining in check and a modestly growing economy, we believe fixed income is well positioned relative to equities on a risk versus reward basis. While ten year Treasury yields have fallen to around 4%, we believe the likelihood of a meaningful near term rate increase, which would cause bonds to under perform, is unlikely. In the corporate bond sector, we believe spreads will likely continue to grind tighter, creating attractive buying opportunities compared to Treasuries. Additionally, credit quality is improving.
Mortgage-backed securities and asset-backed securities continue to record strong relative performance. We see this continuing as these markets benefit from reasonably strong fundamentals and investor demand. While Fannie Mae and Freddie Mac have both been in the press lately due to accounting concerns, the impact to the mortgage pass-through market has been largely insignificant. These accounting issues may present a concern to equity investors; however, we believe the risk to fixed income investors is slight.
OutlookWe expect to see some volatility as we head into year end; however, we believe investors will be rewarded by staying in the markets. We expect weaker near term economic fundamentals to improve as we move into next year, creating opportunity for equity investors and a good coupon-clipping environment for bond investors. As always, we believe that it pays to be diversified. Sarbanes Oxley Regulations
Key points were: the Model Audit Rule is referenced in the Stat instructions and therefore takes effect upon final approval in all NAIC jurisdictions. The work on the proposals has been divided at the NAIC to handle Corporate Governance, Auditor Independence and Internal Controls. The first two are under way and the third is waiting until consensus on the first two has been achieved.
The NALC after the meeting sent out a survey of companies regarding the requirements and the data from the responses is being processed. Larry Johnson from IHLC is serving on the NAIC/AICPA subgroups working on the proposals, and Mr. Stephenson continues to work with industry and regulators to positively effect the proposals. He can be reached at ed.stephenson@barnert.com. Dinner & Awards Banquet
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George
Wise & Cory Zass from the Austin Texas firm of Actuarial Risk Consultants gave
an interesting presentation on the general role of the actuary within the
financial services sector and ways those actuaries have added value to
organizations. 
Cory
and George went on to describe real life examples where actuaries are involved
in many facets of the industry including:
The
NAIC operates by a committee system (called committees, task forces, and working
groups) with work first occurring on the lowest level of the committee hierarchy
and then moving upward through the approval process. This year the NAIC
reorganized it committee structure, resulting in a lower number of standing
committees. In addition, each committee was to set three goals that could be
accomplished within a twelve-month period and for which they would be held
accountable. The result has been an accelerated rate of changes occurring at
the NAIC. It is now more important than ever that companies keep abreast of
NAIC activity.
There
are many other key areas of reporting to monitor. Proposed revisions of the
Model Audit Rule would incorporate modified Sarbanes-Oxley requirements to apply
to most all insurers. A new risk-based state examination process is being added
to the current state financial examination process which will result in higher
examination expenses for all companies. The role of the NAIC Securities
Valuation Office (SVO) has dramatically changed this year, resulting in a
drastic reduction of the number of securities to be filed with the SVO for
valuation. The lost SVO filing fees, however, means the industry is being
assessed the expenses of keeping the SVO office and staff going. New
international insurance accounting standards are being developed which may
ultimately result in U.S. statutory changes. Work done within the Capital
Adequacy Task Force (RBC), the Emerging Accounting Issues Working Group and the
Statutory Accounting Principles Working Group also directly affects the
industry.
With
the third quarter coming to a close, the US economic recovery continues at a
tepid pace. Slowing job growth, reduced consumer spending and a fall-off from
historically high productivity levels are some of the visible signs of this
lukewarm recovery. Add to this higher oil prices and the uncertainty caused by
terrorism and the upcoming elections, and it’s no wonder many economists have
been reducing their GDP forecasts.
We
believe the long term economic key is strong job growth. Should we see a return
to 200,000+ growth, we would be convinced that better times are ahead. If job
growth remains soft, particularly if it falls to below 100,000, we believe the
economy will stall. 
Stock
Market: After a strong start of the year, the stock market has been moving
sideways to lower in recent months. With corporate profit margins declining to
more moderate levels and expectations for earnings growth down, market
valuations have slid into a more fairly priced range. Near term, we expect
equities to continue with the same lackluster performance we have seen in recent
months, followed by larger gains as the economy strengthens. 
More
corporate upgrades than downgrades were recorded by the rating agencies in the
third quarter and in August Moody’s default rate was zero. In this environment,
the demand for corporate bonds, both domestically and overseas is high and
supply is low
Real
Estate Market: Occupancies and rental rates for most real estate types continue
to improve. We expect performance to remain positive to strong as the economy
strengthens. Real estate valuations remain strong because of low interest rates
and the high relative yields generated by income producing properties. 
Ed
Stephenson, Director of Operations of Barnert Associates, Inc. gave a recap of
the current developments of the NAIC’s efforts to incorporate the Federal
Sarbanes-Oxley Act into the requirements of the Model Audit Rule.
The
requirements of the first two areas would require establishing an audit
committee made up of members of the Board of Directors who are independent of
management and ownership, therefore requiring the appointment of independent
board members in spite of the fact that a company is not a public company.
There are other, new requirements for auditors, including changing the
requirement for partner rotation from every 7 years to every 5. The current
threshold for the requirements is $25M in annual gross premium, although there
is discussion of a $100M threshold for some of the new requirements discussed.
