Analysts Worry About Industry Ties

To Stock Market Fluctuations

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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.

So far, though, few insurers are publishing much information about their UL guarantee exposure, says Moodys analyst Scott Robinson.

“It seems as if there isnt a lot of disclosure about an issue until theres actually a problem,” Robinson says.

Other analyst reactions to the mid-year climate:

- Moodys analysts are bringing back the old debate about the ability of stock companies to be good insurance companies.

“Moodys continues to believe there is an inherent conflict between shareholders return expectations and policyholders demand for financial strength,” the Moodys analysts write.

The demutualization wave has left only a few major mutual life companies in operation. The mutuals participating life products are now more unusual and more attractive than they were, the Moodys analysts write.

The Moodys analysts add that the newly public life insurers have placed more emphasis on shareholder returns than on financial strength.

“Partially as a result of this difference in emphasis, the average rating gap of mutual companies over stock insurers increased in 2003 to its widest level since 1995,” the Moodys analysts observe.

- Analysts at Fitch Ratings, Chicago, are predicting that a thaw in the U.S. life mergers and acquisitions market will improve ratings as strong insurers acquire weak insurers.

- Analysts at Fitch and Moodys are predicting that Wall Street will respond to reinsurers new wariness of secondary life insurance and annuity product guarantees by getting investors to back the guarantees. The risk might be significant, but, “for the right price, anything can be securitized,” Robinson says.


Reproduced from National Underwriter Edition, July 16, 2004. Copyright 2004 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.