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NAIC Suffers Dip in Investment Income, Budget Shows

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The National Association of Insurance Commissioners’ (NAIC) revealed in its proposed 2012 budget that a significant loss in projected investment income in the third quarter due to volatile markets has eliminated the $3 million projected total net revenue margin for the NAIC for 2011 initially projected back in June.

The NAIC also said in its budget proposal that further fluctuation of the market value of the NAIC’s portfolio is expected through the end of 2011 due to the volatility.

Unrealized gains that were at $2.1 million as of June 30th have fallen to a loss of $2.9 million as of Sept. 30, a $5 million plunge, according to the report.

The 2011 mid-year projections showed a net margin of negative $1.2 million without the expected bump from the structured securities project and investment income, and without the fiscal impact proposals, which was better than first budgeted.

The total projected 2011 revenue after business and fiscal impact statements and the structured securities project was $4.159 million, according to the revenue and expense summary. 

The NAIC 2012 proposed budget includes total revenues of $79.2 million and total expenses of $77.6 million, which represent a 4.99% and 2.52% increase, respectively, from the 2011 budget. The base budget includes revenues of $78.2 million and expenses of $75.4 million, a decrease of .58% and .42% respectively from the 2011 projected totals. The base budget does not factor in the structured security project and the fical impact proposals.

The budget proposal line items and text go  back and forth between the projected 2011 totals and revenues, in light of the “significant change in investment income,” and the expectation of further volatility. 

The NAIC uses Prairie Capital Management  LLC and investment managers, and has parameters on investments with U.S. publicly-traded equities targeted at 32.50% of allocation of investments, but allowing for a range between 23% and 63%. Foreign equities are not to exceed 10% of the account’s market value, with a minimum requirement of 3%. The principal subcomponent of the income securities category, which is not to exceed 67% of the account’s market value, is U.S. publicly traded domestic fixed income securities, but these cannot exceed 38% of the account’s market value. 

The NAIC leadership approved a report from a consulting firm on Sept. 22 to change the NAIC’s liquid operating reserve from a flat 80% to a target range of 80% to 91%. The liquid reserves are projected to increase to 83.9% by the end of 2012 from 79.3% at the end of 2010. By the end of this year, the liquid reserve is expected to be at 82%. These numbers exclude the structured securities project.

The operating reserve, although some trades have lambasted the ratio in the past, is designed to ensure the financial stability of the NAIC, it argues and is commensurate with not-for-profit associations.

Database filing fees continue to make up the lion’s share of the organization’s revenue, at 33.1% or almost $26 million in revenue projected for 2012. Publications and insurance data products are expected to garner almost $19 million, at 24.2% of revenue, followed by Services such as SERFF, securities valuation and OPTins at almost $18 million in revenue, or about 23% of total revenue composition in 2012.

By far the largest expense is salaries, with their taxes and benefits, reaching 65.2% of expenses and costing $49.2 million for 2012, according to the budget proposal.

All other NAIC expenses are all less than 10% of the expense composition, including travel. Travel is projected be 5.2% of the 2012 budget, with very close to $4 million in expenditures budgeted, behind lease and office equipment at 8.6% and professional services at 7.2% of the 2012 expenditures.

Most increases are incremental in both expenses and revenue with the exception of the investment income, which is suffering due to the volatile markets, and a salary expenditures for new advisory positions for solvency and financial regulation. See:


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