Investor Relations and Insurance Companies….

Investor Relations and Insurance Companies….

One example of how insurance companies view 401k investors can be found in a letter sent to multiple Federal agencies by CFO Lillis of Principal Financial Group.  Mr. Lillis’ letter dated October 22, 2012 was addressing recently enacted proposals by the Board of Governors of the Federal Reserve System,  the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (collectively, the “Agencies”).  The Agencies intent was to establish an integrated regulatory framework for most banking organizations and improve their ability to withstand periods of stress.  Basically, the Proposals would impose minimum capital requirements on savings and loan companies (“SLHCs”) such as Principal Financial Group, Inc. aka “Principal.” The Proposals were designed in part to implement changes required by the Dodd-Frank Wall Street reform and Consumer Protection Act.

Word Cloud Investor RelationsAt that time, Principal had $152.1 billion in assets, and Mr. Lillis was arguing that if “non-guaranteed separate account assets” (401k retirement assets) were included in the capital ratios recommended, this could be an extreme and unnecessary hardship on insurance companies including Principal.  He adds that “Insurers are in the business of managing risk, under the oversight of the state-based insurance regulatory system.” He continues that the Principal Life Insurance Company (aka PLIC) “…prudently maintained large cash balances during the financial crisis from late 2008 to mid-2010.”  They accomplished that goal by reported billions of dollars in unrealized losses in the Principal U.S. Property Separate Account.  That precaution proved to be unnecessary as actual net cash flows remained fairly steady, consistent with expectations, and predictable.

On page 9, Mr. Lillis makes a troubling statement concerning minimum state insurance capital requirements.  Even though Principal concluded it was necessary to impose a “withdrawal restriction” on tens of thousands of 401k investors in the U.S. Property Separate Account, resulting in the loss of billions of dollars in income for the investors, Principal maintained state capital levels at the end of 2008 that were approximately 440% of the minimum required.  This means the “withdrawal restriction” was simply an over-reaction by Principal that was unnecessary!

On page 11, the letter states… ” non-guaranteed separate accounts would be limited to those separate accounts in which the insurance company has no asset or liability risk. PLIC’s non-guaranteed separate accounts primarily consist of those assets that support retirement savings plans such as 401(k) qualified defined contribution plans. The asset and liability risks of these separate account products are passed through to the underlying plan participants; thus the insurance company retains none of the risk. These assets accounted for 40% to 45% of Principal’s total assets at the end of 2011.”

Let’s see, with $152.1 billion in total assets, 45% would represent about $68.5 billion in 401k non-protected assets given to Principal to invest without any fiduciary responsibility!  For a copy of the letter, available under the Freedom of Information Act, click on the following link… CFO LILLIS LETTER

Author: Dennis Myhre

Mr. Myhre can be contacted at..... dmyhre@fiduciaryfactor.com