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Life Health > Life Insurance

Pricing Key To Insurers' Success In '02

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Steeled by a difficult 2001, insurers should fare well this year with pricing an important factor in determining success, according to a number of industry experts.

A report from Moody’s Investors Service in New York states that despite a recession and the events of Sept. 11, the United States life insurance industry will remain stable during 2002.

Patrick Finnegan, a senior vice president with Moody’s, says direct writers will benefit from mortality improvements. “Maybe they have been leaving some money on the table with reinsurers and they won’t have to cede as much business,” he says.

Over the next decade, mortality should continue to improve and insurers can earn returns on business that would otherwise be ceded, he adds.

While a positive for the industry, Moody’s cautions in its report that aggressive pricing of products based on improved mortality makes good underwriting more necessary and could have a negative impact on the industry if mortality does not improve as much as some have predicted.

Other predictions offered by Moody’s analysts suggest: consolidation as well as a stable ratings outlook supported by such factors as sound asset quality, predictable and strong premium flows, and low financial and operating leverage.

Consolidation, according to the report, will be driven by slower revenue growth that has driven equity valuation of small to mid-sized insurers, a growth rate that will make them more attractive takeover targets.

Finnegan says the pace of consolidation will not necessarily be fast unless companies misstep. “If a company stubs its toe” by losing the loyalty of its distribution force or taking a large capital charge, then being acquired is something that could come more quickly, he adds.

The need for retirement products is a mixed blessing, the report says. There has been rapid growth of sales of accumulation products, but competition among players has also increased, the Moody’s report continues.

Scale matters in this market, particularly in areas such as variable annuity sales, according to Finnegan.

Demutualization will be affected by interest rates, he continues. If interest rates remain high and stable, mutual companies will be able to pay policy dividends and survive, he says. But if they go very low, more companies could demutualize, Finnegan adds.

Julie Burke, a managing director with Fitch Inc., a rating agency in Chicago, says that if consolidation does occur in 2002, it could be through purchases of distributors.

The interest in buying asset management operations may have cooled for the time being because of the volatility that the equity market is experiencing, she adds.

Ironically, that volatility may have brought down the price of asset management operations, Burke says.

For insurers who bought asset management operations at their peak valuations four to five years ago, new accounting rules with stricter impairment requirements may be reflected in income statements. Goodwill accounts for the perceived value of a company over and above the actual value of its tangible assets.

For most companies, however, ratings already reflect goodwill paid, she adds.

The demand for life insurance may pick up following 9-11, Burke says.

The increase in demand could, in certain instances, be offset by credit losses, she adds, noting the Enron bankruptcy and Argentina’s default on debt obligations. She says insurers could face charges on collateralized debt obligations, or pools of securities. Additionally, insurers may face spread pressure on minimum credit guarantees resulting from low interest rates, Burke says. Companies have several choices and rating agencies will need to look at those choices, she adds. They include: taking a charge to earnings, buying assets of longer duration or buying securities with lower credit quality.

The improvement in mortality mentioned in the Moody’s report was also raised recently during a seminar sponsored by Swiss Re in its New York office.

During a discussion on the life insurance industry, Jacques DuBois, a member of the executive board and deputy head of Swiss Re Life & Health, noted that mortality factors had improved, which is a positive trend since mortality risk is an important part of its reinsurance business.

Speaking during a conference sponsored by Keefe Bruyette and Woods in New York, Jack Lay, executive vice president and CFO with Reinsurance Group of America in St. Louis, said that as mortality improves the premium scale will decrease and reinsurance pricing will become more competitive.

In an interview, David Atkinson, executive vice president and chief operating officer with RGA, said that in 2002, life reinsurance prices could firm up although not to the degree they will in the property-casualty reinsurance market.

Automatic reinsurance, or reinsurance in which either the entire product or most of the product is reinsured, has been susceptible to price presssures, he adds. This is due, in part, to offshore reinsurers that compete heavily on price. Facultative reinsurance, in which individual risks can be accepted or declined, has been less susceptible to price, he adds.

He also predicts that in 2002, there could be at least one acquisition in the life reinsurance area.

Pricing was also an issue raised by Lawrence Doyle, president and CEO of Annuity and Life Re in Bermuda during the KBW conference.

Doyle says that because Annuity and Life Re operates offshore, it has a lot more flexibility in pricing.

The benefits of operating without income tax boost net operating income compared with U.S. reinsurers, according to Doyle.

The increased demand for insurance and better pricing will make 2002 a good year for insurers, said Allan Zimmerman, director of research with Fox-Pitt Kelton, a Swiss Re unit based in New York. “2002 will be a very good year in insurance stocks. I am unabashedly positive.”

Zimmerman is positive in the long run for life insurance stocks and in the short run for property-casualty stocks.

Over the long run, life insurance stocks should perform well because insurers are following consumer demand and moving from a traditional protection business to a savings business, Zimmerman adds.

Colin Devine, managing director with Salomon Smith Barney in New York, says that going into 2002, the insurance industry as a whole has never been stronger. He notes, among other things, record life insurance sales in fourth quarter 2001.

In the coming year, Devine says there could be a realignment and consolidation in the variable annuity market. Companies such as Lincoln Financial Group in Philadelphia that are focused on the higher income market stand to perform well, he adds.

He also noted Sun Life Financial Services of Canada’s range of businesses, including the recently acquired Clarica Life Insurance Company, and Massachusetts Financial Services, a mutual fund provider.

Devine adds that in 2002, companies should reevaluate their market strategies. For instance, Mutual of New York Insurance Company and Allamerica need to evaluate their positions, he says. Allamerica needs to look at its decision to remain a multiline and determine if it should focus on a particular business, Devine adds.

Metropolitan Life should sell its personal lines business, he says, because of its effect on performance. He says the company is doing the right things, but that the personal lines operations do not further its goals.

Devine also says Prudential Financial, which recently demutualized, has a management that goes into 2002 with a record of taking action, including selling its health and reinsurance units and streamlining its agency force. “They have delivered on enough things over the last year or two,” Devine says.

Reproduced from National Underwriter Life & Health/Financial Services Edition, January 21, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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