Analysts Worry About Industry Ties
To Stock Market Fluctuations
Analysts are happy about U.S. life insurers recent profits but are worrying about the industrys increasingly strong ties to ups and downs in the stock market.
A drop in bond default rates helped improve life insurers investment earnings in the first half of the year, and the stock market rebound eased life insurers exposure to guarantees that protect variable annuity, variable life and variable universal life holders against stock market turmoil.
The last 2 quarters were some of the easiest in this sell-siders career, with very few negative surprises and most companies reporting results in line [with] or better than expectations,” according to Jason Zucker, a securities analyst at Fox Pitt, Kelton Inc., New York, a unit of Swiss Reinsurance Company, Zurich.
Life company stocks are cheap and a stronger economy could help the performance of companies with big group life and group disability operations, Zucker writes.
Now that the stock market has come back up, “we have seen the risk profile of many companies improve,” according to a mid-year industry assessment by analysts at Moodys Investors Service, New York.
As of July 6, only 1% of the U.S. life insurers that Moodys rates were under review for a possible downgrade.
But the analysts also are talking about product features, such as minimum income benefit guarantees, that might force U.S. life insurers to pay large sums to customers if the stock market went down and stayed down or interest rates continue to hover near zero.
Zucker cites “emerging exposures related to the new variable annuity guarantee features” as a reason to avoid life insurers with big VA operations.
Moodys analysts have argued that some issuers of universal life policies are depending too heavily on customers abandoning their policies. Persistent low interest rates could hurt insurers with aggressive lapse assumptions both by cutting their earnings and leading an unusually high percentage of policyholders to hang on to their policies, the analysts argue.
The National Association of Insurance Commissioners, Kansas City, Mo., has started to look at the UL secondary guarantee issue.