WEEKLY BULLETIN
from Tanya Lewicki
Visit our website: www.aimu.org
33-11 FRIDAY, AUGUST 19, 2011
U.S. DEBT DOWNGRADE: NO SIGNIFICANT IMPACT ON INSURERS
Standard & Poor’s announced on August 5, 2011, that it “downgraded its long-term counterparty credit and financial strength ratings and related issue ratings on all AAA-rated U.S. insurance groups to AA+ with negative implications.” The ultimate ramifications of a downgrade of long-term U.S. bonds are impossible to determine at this point but, in the short-term, a U.S. bond downgrade will not adversely affect the operations of U.S. property/casualty (P/C) insurers in any significant way, nor will it impact insurer solvency or liquidity. “The nation’s property/casualty insurers have very limited direct exposure to the U.S. government bond market and have collectively set aside hundreds of billions of dollars to pay unanticipated claims,” said Dr. Robert Hartwig, president of the I.I.I. and an economist. “Both of these factors will enable the industry to operate effectively despite the recent downgrade of long-term U.S. bonds.” Consequently, Hartwig added, “Existing policyholders, people and businesses filing claims and those seeking to purchase insurance will not experience any difficulties arising from the downgrade.” In addition, according to the National Association of Insurance Commissioners, an organization representing state insurance regulators: “There is no impact on insurer investments in U.S. government and government-related securities from the actions recently taken by the rating agencies. One theoretical effect of a downgrade is that interest rates on newly issued U.S. government bonds and most other forms of fixed income securities would rise. This would mean that the market value of existing U.S. government bonds and other fixed income assets would fall. The extent of the drop in value would depend on many things, but the net impact on the value of assets held by P/C insurers should be modest and manageable. Investment income is a comparatively small part of P/C insurer revenues when compared to the monies these insurers generate via premiums. Premiums received in any given year generally cover P/C insurer claims and expenses for that 12-month period. As such, even if there were a drop-off in U.S. government bond income it would have an insignificant effect on insurers’ ability to pay claims and expenses. Moreover, the industry’s policyholders’ surplus—the excess of assets over liabilities (what companies in other industries call “net worth”)—was a record $556.9 billion at year-end 2010, an 8.9 percent increase over where P/C insurers’ policyholders’ surplus stood as of December 31, 2009 ($511.4 billion). (Insurance Information Institute, 8/2011.)
FORECASTER: “TOUGH YEAR, NOT UNLIKE 2009”
Import and export deep sea container volumes across Europe have continued their downward slide from a high in March, according to Global PortTracker. "The crisis in Greece combined with the specter of Italy and Spain defaulting is destroying what little consumer confidence that was here. We can also expect more austerity measures as the bailout has to be paid for," PortTracker said Thursday as it released its latest quarterly forecast. The report is prepared by Hackett Associates LLC. The report sees continuing weakness for North Europe port it tracks -- Hamburg, Bremen-Bremerhaven, Rotterdam, Antwerp, Zebrugge and Le Havre, and suggests "this will only get worse." “We are seeing a slowdown in Asian
exports with growth rates of 5 to 6 percent or less being projected,” Hackett said. (American Shipper, 8/15/2011.)
CONSUMERS NOT BUYING
The first decline in U.S. consumer spending since September 2009, in June gave a new sign the economy is slumping as the transportation industry heads into the annual peak season for holiday imports. The news followed the Institute for Supply Management’s report that U.S, manufacturing growth was the slowest in two years. Consumer spending accounts for 70 percent of U.S, economic activity and is a leading driver of containerized imports and intermodal traffic. The government figures provided “another dismal report on the consumer side of the economy,” said Chris G. Christopher Jr., senior principal economist at IHS Global Insight. He said consumers’ mood “is at depressed levels and those households that are not living paycheck-to-paycheck are saving more. This is considerably worrisome, since we are a consumer-oriented economy.” (The Journal of Commerce, 8/8/2011.)
THE 2011 STATE OF LOGISTICS REPORT
The U.S. economy’s road to recovery during 2011 is like occupational therapy: filled with hard work and occasional setbacks. For the logistics sector, the therapy also involves higher costs and tighter capacity. Business logistics costs rose 10.4 percent in 2010, making up more than half the 2009 decline, according to the 22nd annual State of Logistics report, released by the Council of Supply Chain Management Professionals. The report indicates U.S. logistics costs reached $1.2 trillion in 2010, up $114 billion from 2009. Transportation costs took a big jump, up 10.3 percent overall. Motor carriage, which comprises 78 percent of the transportation segment, rose 9.3 percent, while air, rail, water, and pipeline increased by 15.4 percent in the same period. The good news is, both equipment and labor capacity were able to meet demand. “Most of the laid-up capacity has returned to the market, with the notable exception of ocean carriers”. Ocean carriers did, however, take delivery of a large number of new-build containerships over the past 18 months, essentially doubling industry capacity. Despite the fact that ocean traffic through U.S. ports contracted in 2010, freight costs for U.S. shippers and consignees rose 14.1 percent. Ocean shipping rates rose significantly from 2009 through August 2010, when weakening demand prompted some carriers in the trans-Pacific trades to seek more volume by reducing spot rates. Spot rates dropped between 40 and 50 percent through the fourth quarter of 2010 and into 2011. In addition, some carriers responded to shipper demands for rate adjustments for “slow steaming”, which ocean carriers do to cut fuel consumption. On the inland waterways side, revenue ton-miles on the Great Lakes posted a 33.4-percent gain in 2010, mostly on iron ore shipments. (Inbound Logistics, July 2011.)
SOFT MARKET NEAR BOTTOM: RIMS
Slight decreases in the average renewal premiums in the second quarter of 2011 for several lines within the commercial insurance market support that the soft market may be near bottom, according to the RIMS Benchmark Survey. The survey, administered by Advisen Ltd., found that general liability, property and workers compensation premium fell less than 1%. In the second quarter, the Risk & Insurance Management Society Inc. said in a statement. (Business Insurance, 8/15/2011.)
OFAC CIVIL PENALTIES
Norton Lilly International, Mobile, AL, has been assessed a penalty of $18,750 for its violation of the Iranian Transactions Regulations. In the transaction, Norton acted as a paying agent for a foreign entity, to pay port charges incurred at an Iranian port in the amount of $14,936. OFAC determined that Norton did not voluntarily self-disclose the violation to OFAC and that the violation constituted a non-egregious case. Norton has instituted remedial measures by adopting procedures to comply with OFAC’s regulations in the future. (OFAC website, August, 2011.)
CMA CGM (America), Norfolk, VA, has remitted $374,400 to settle allegations of violations of the Cuban Assets Control Regulations. OFAC alleged that CCA, a global container shipping company, facilitated the exportation of goods from foreign ports to Sudan on at least two occasions and, in 28 separate transactions, accepted payments for shipping services provided by its foreign parent company, CMA CGM, or its foreign affiliates, in connection with shipments between third countries and Cuba, Iran, or Sudan. The transactions involving the alleged violations were valued at approximately $402,265. OFAC determined that CCA did not voluntarily self-disclose the matter to OFAC and that the alleged violations constituted a non-egregious case. The alleged violations appear to have resulted from a pattern of conduct over a period of approximately three years; given the size and scope of CCA’s operations and the nature of its international business, it appears to have lacked an adequate compliance program to avoid U.S. sanctions violations; some of the goods exported from third countries to Cuba and Iran may have qualified as agricultural/medical products under the Trade Sanctions Reform and Export Enhancement Act of 2000 and, thus, may have been eligible for a license. (OFAC website, August 2011.)
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