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The recent events have caused numerous questions related to the solvency of the insurance companies. In years past, stable value portfolios invested heavily in traditional GICs, investments that ultimately rely upon the health and safety of the insurance company to make good on their promise to pay. Today this is no longer the case. The DAP/401(k) Stable Value Fund has no exposure to these contracts. Instead, all of the assets in the Stable Value Funds are invested in high quality bonds that are owned by the plan for the benefit of plan participants. This insulates participants from the solvency risk of insurance companies and better positions the Fund to achieve its objectives.

Questions of insurance company solvency are natural. The expected claim costs associated with the terrorist attacks vary widely but estimates range in the billions. The real costs will not likely be known for months perhaps years into the future. Despite this uncertainty, it should be noted that in general the financial health of the life insurance industry is better today than just about any time in the past. Not since the mid 1950′s have insurance companies been as well capitalized, or closely regulated as they are now. This suggests that on the whole, the life insurance industry will undoubtedly weather this storm.

As the manager for this important plan option in you plan, we have been diligently pursuing as much information as is currently available to access the situation. Based on our work to this point, we have little concern relating to these expected losses, as they appear manageable for all of the issuers in your portfolio. To put some perspective on this, the initial loss estimates in aggregate roughly amount to the losses incurred for Hurricane Andrew. Without question, some issuers will be affected by virtue of corporate affiliations with property and casualty carriers but the solvency of companies that participate in your portfolio are not an issue. Some companies will no doubt see their rating affected but their ability to pay isn’t in question at this point.

Naturally, this situation is very fluid and will continue to change. Rest assured that we are doing all that we can to get as much information as possible to continue our monitoring efforts. Also, be assured that we will continue to keep you apprised of the facts as they become available.

PRIMCO Capital Management

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