Needham, Mass. — Has the financial crisis in the United States has claimed yet another victim? According to a new report, "Guilt by Association or Real Trouble? Outlook for US Life Insurer's Profitability and Spending" from TowerGroup, U.S. life insurers—among the largest institutional shareholders in the world—have written off major investments in struggling financial firms. As a result, the life insurance industry is facing a number of challenges to profitability in the wake of the financial crisis, and needs to look to initiatives that will prevail though 2009 as the industry recovers.
The report's author, Rachel Alt-Simmons, research director, insurance for the Needham, Mass.-based firm, says that, in general, the highly capitalized life insurance industry in the United States has largely been thought to be immune to the credit crisis. But like many other financial institutions, the interconnectedness of banks, asset managers, brokerage firms and other insurers is proving to have a much greater impact than previously anticipated.
"Through their massive investment portfolios and separate accounts, insurers are some of the largest shareholders in the world," Alt-Simmons says. "The write-downs associated with entities such as Lehman Brothers, Fannie Mae, Freddie Mac, and Washington Mutual continue to affect insurers' balance sheets, cutting into short-term profitability and potentially undermining their capital base."
Just last week, David Stertzer, CEO of the Falls Church, Va.-based Association for Advanced Life Underwriting, said life insurers should be granted access to funds via the Treasury Department’s Capital Purchase Program.
“After discussions with key industry partners, we believe it is important for Treasury to give serious consideration to make capital available at the wholesale level through life insurers,” Stertzer said. “Life insurance companies are one of the largest purchasers of corporate bonds; to date, life insurance companies hold approximately 18% of the U.S. corporate bonds.” He went on to note that in addition to bonds, life insurers also have substantial investment in equities, commercial mortgages, government bonds and other assets.
Conversely, New York Life came out yesterday saying that it doesn't need any help from the government, distancing itself from Stertzer's open hand. A spokesperson for the insurer said that because the firm is so well capitalized, it will not participate in the U.S. Treasury Department capital purchase program.
"New York Life has the highest possible ratings from all four of the major rating agencies," the spokesman said. "The company can meet all of its strategic objectives without government capital, its businesses are strong and profitable and it is committed to remaining a mutual company operating for the sole benefit of its policyholders.”
Annuities also are feeling the pinch, according to the report. Fixed annuities, while still seeing good sales numbers due to positive interest rates, may run into trouble as policyholders worry about their potential risk given the top seller of fixed annuities is AIG Annuity Insurance Co.—a name inspiring trepidation in many.
Variable annuities are not faring as well as fixed annuities, slowing month-over-month in the past year as the troubles in the equity markets keep investors at bay, the report says. The typical hedging strategies for life insurers, launched in the early 2000s, have not been tested in a down market, and hedging costs increase with market volatility, thereby reducing product profitability.
Fitch Ratings recently released a special report summarizing its views on the variable annuity market. The New York-based rating agency estimates that capital (and reserves) needed to support the variable annuity business in the United States has increased by up to $15 billion during 2008 year-to-date, due to the dramatic decline in the equity markets. At the same time, earnings have been negatively affected due to lower fee income from declines in net asset values, higher hedging costs and increased reserve requirements to support the product guarantees.
But despite all this negativity, Alt-Simmons believes there is a silver lining to this situation.
"The good news is that the industry is well positioned for recovery and the majority of insurers will easily ride out the storm," she says. "However, for the remainder of 2008 and well into 2009, these insurers will focus heavily on reducing expenses and containing costs."
This means that in the short term, profit pressures will cause life insurers to pull back on non-core initiatives, although customer-facing projects, product development and risk management will continue to garner full funding and support.
Sources: TowerGroup, Association for Advanced Life Underwriting, New York Life, Business Wire, INN archives
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