NU Online News Service, Dec. 11, 2003, 12:05 p.m. EST – Even though the worst may be over for U.S. life insurance companies, Standard & Poor’s Ratings Services, New York, maintains a negative outlook for the industry for 2004.[@@]

The recent credit deterioration in the sector appears to have faded, as evidenced by a drop in the number of company credit downgrades, S&P says. In addition, a slowly recovering stock market, improving interest rates and a strengthening corporate credit environment will help lift the industry, S&P says.

But the industry still is suffering reduced capital and earnings stemming from large investment losses, says Rodney Clark, an S&P director. Moreover, the increased cost of variable product guarantees and pension benefits, and the reduced level of fee income, also point to a downbeat outlook, he says.

In 2004, S&P expects to see more downgrades than upgrades in the life sector. So far in 2003, S&P has placed 31% of the U.S. life insurance companies it rates on a negative outlook or on CreditWatch.

“This is well improved from the 40% peak in early 2003,” says Clark. “So, while problems persist, a light at the end of the tunnel is becoming visible.”

Merger and acquisition activity in the industry appears to be picking up after a few slow years, a factor that could strengthen the outlook for the industry as a whole, S&P says.

The rating agency notes that there were 12 significant acquisitions or divestitures in the industry this year, including the recent announcement by a unit of AXA S.A., Paris, that it has agreed to acquire MONY Group Inc., New York.

For the most part, these agreements appear to be a good fit for the companies involved, unlike some acquisitions announced in the recent past, S&P says.

Clark says the life industry’s credit problems stem, in part, from investment losses in bond portfolios and the collapse of stock prices in the airline, technology, telecom and energy sectors. In addition, the weak economy brought about a number of corporate bond defaults.

“2003 was a bad year for investments, but it was still better than 2002,” Clark says.

Clark says that, although many of the industry’s problems have stemmed from economic factors beyond its control, there is much that carriers can do to improve results.

“A lot of companies are making the decision [that] they don’t have the scale to be in certain businesses and are beginning to sell those businesses,” he says.

S&P also is seeing insurers reduce their credit default exposure and variable product risk by reducing investment concentrations in single corporate issuers and in particular industries as well as by generally cutting their exposure to low-rated notes and bonds. Insurers also can improve performance by improving pricing of variable products, Clark adds.

The prices are “probably still not commensurate with risk, but they’re getting closer,” he says