On Eve of First Quarter Results, Insurers Face Challenges
As life insurers get ready to announce first quarter results, industry analysts say that as a whole the sector continues to face challenges.
Credit losses, the impact of low interest rates and heightened competition are among the problems that continue to hound carriers, they add.
Fitch Ratings, in a just-released report, cites the effect of spread compression in a low interest rate environment on fixed products along with fee pressure on variable products as a “double whammy” on insurance company earnings.
Spread compression could be alleviated to some degree by a new model law of the National Association of Insurance Commissioners that reduces minimum guarantees on fixed products to 1.5% from 3%, the report suggests.
However, Fitch continues, the degree of relief depends on whether state legislatures, enact the model. For the time being, the report adds, state-mandated minimum guarantees are contributing to spread compression. Although, this does not pose an immediate solvency issue for life insurers, it weakens the ability to grow earnings and capital in the current environment of low interest rates, poor credit markets and volatile equity markets, the report says.
Those factors, described in a year-end 2002 report issued by Fitch, will continue to affect life insurers, says Julie Burke, managing director with Fitch in Chicago.
For instance, on the issue of credit quality, some insurers have taken steps to recognize asset impairment, but other companies have yet to do so, she says.
Moodys Investors Service, New York, is maintaining a position enunciated at the beginning of the year that the life insurance industry faces significant hurdles in the current economic environment, says Robert Riegel, a managing director with Moodys life and health insurance group.
Default rates on corporate bonds, which impact insurers portfolios, remain at high levels compared with the 1990s, Riegel says. However, he does add that they seem to have reached their highest point in the second half of 2002 and have stabilized somewhat.
Some companies have reacted to the compression between the rates they pay out for fixed annuities and what they can earn on investments by pulling fixed annuities off of the market, he says.
But companies are really being affected by in-force business with higher rate guarantees, Riegel continues.
If a minimum guarantee rate is 3%, then companies need to earn a 4.5-5% spread, he says.
Initial indications for the first quarter, according to Riegel, are that there are no major negative surprises regarding life insurers recognition of losses.
Market conditions have caused the Fox Pitt Kelton index to be down 4% in first quarter 2003 compared with a 3.2% decline in the S&P 500 Stock Index, according to Bart Zanelli, senior vice president–corporate finance with Fox Pitt Kelton Inc., N.Y. In the first quarter, the S&P declined by 3.2%.