The recent survey just announced by our friends at PriceWaterhouseCoopers noted that only 11% of financial services CFOs will NOT use the FAS 159 fair value option, effective November 15 for most companies.  More than a quarter of the CFO’s see implementing fair value (FAS 159 coupled with FAS 157) will have the greatest impact on their business or finance team.  Survey respondents were the nearly 400 senior finance executives attending PwC’s Finance Executives Forum, responsible for various industries, including banking, capital markets, consumer finance, real estate and asset management firms.  (Read more at CFO.com’s web site: http://www.cfo.com/article.cfm/9254335/c_9256135?f=home_todayinfinance&x=1). 

Reading this article reminded me of this famous scene from E.T., the Extra Terrestrial:

Elliot: He’s a man from outer space and we’re taking him to his spaceship.
Greg: Well, can’t he just beam up?
Elliot: This is REALITY, Greg.

Is this PwC survey an accurate reflection of reality?  Or, could this be a more self-serving effort on the part of the Final Four firm to push their expertise in implementing FAS 159?    More importantly, does this survey accurately depict what insurers will do?

In brief discussions on this topic with large insurers, the answers tend to be a non-committal "We are reviewing it."  But, can the largest, publicly held insurers shy away from FMV when their competitors for capital (other publicly held institutions) are doing so?  And, if the largest insurers move toward FMV, won’t medium and then smaller sized GAAP filing insurers be under pressure to follow?

Is the PwC survey reality?  Or, are they trying to ‘beam up’ a solution to a non-existent problem?

Join the discussion, by going to our forum, under the FAS 159 topic.

If you haven’t read about SWF’s lately, you’ve been missing the juicier parts of the financial press.  I guess when general interest newspapers in the U.S. need to goose their circulation, they go for celebrity gossip, alien abductions, or Roger Clemens’ contract.  When financial papers need to goose their circulation they trumpet the latest large numbers.  How about $2.5 trillion and growing at 500 billion per year?  That’s more than the $1.6 trilliion in hedge funds… and that’s what Morgan Stanley has estimated for SWF’s.  What’s an SWF?

A Sovereign wealth fund (SWF) is a fund owned by a country (usual its central bank) composed of financial assets such as stocks, bonds, property or other financial instruments.  SWFs differs from foreign exchange reserves by maximizing long term return and are not created or used for short term currency stabilization.  

In other words, our friends in China have grown restive with their investment in US Treasuries and want more.  (They already have currency reserves invested in primarily UST and MBS well in excess of what most economists believe they might need for currency stabilization.)  Their most recent, high profile investment was in the private equity firm, The Blackstone Group

And, it’s not just China.  Here’s an overview:

Note 1: Not yet finalized.    Source: Morgan Stanley(2007).

It’s good to be the popular kid on the block, with the World’s reserve currency, a stable government and legal structure ,and the largest military in history to protect it.  However, how good is it when those other kids are buying parts of your house with the dollars you paid for their baseball cards and chewing gum?  And, those other kids are under no obligation to tell anyone (not even their parents) what they are buying.

This is all fodder for the financial press to moan and grown about  how the U.S. is selling itself to foreigners (true).  But, we should not miss a key point for insurance company investment practices.  If this trend continues (and it does not look like it will halt any time soon), we will see equities (and especially large cap U.S. equities) become more popular and good old fashioned US Treasuries become less so.

Here’s what the Financial Times’ Alphaville Blog (http://ftalphaville.ft.com/blog/2007/05/25/4789/sovereign-wealth-funds-and-the-2500bn-question/?source=rss) said about this trend:

The International Monetary Fund recently cited estimates that central bank buying has depressed yields on long-term US Treasury bonds by between 30 and 100 basis points as prices have risen.  If buying eases, bond yields could rise and prices fall – and a greater share of new reserve accumulation will flow into non-bond assets. 

Yes, we’ve benefited from a strong MBS market as foreign buyers have allocated more USD to this asset class in recent quarters, but where will they go next?  And, how will that impact your company’s portfolio strategy? 

I don’t think you can consider an asset allocation strategy without an estimate of what the growth of SWF’s, Hedge Funds and Private Equities will do to the investment landscape and risk/reward expectations.

Join in the discussion on this topic by going to the Insurer Investment Forum Online (www.saai.com/forum).  I look forward to your comments.

Thank you.