The ratings outlook for life insurers is stable although companies will have to monitor the risks associated with selling variable annuities with guarantees and no-lapse universal life products, according to a new report issued by Moody’s Investors Service, New York.
In its report, 2005 Credit Issues and Trends for U.S. Life & Health Insurance, the company says that at year-end 2004, 73% of a universe of 174 companies had ‘stable’ financial strength ratings; 17%, negative; 4%, positive; 4%, reviewed for downgrade; and 1%, reviewed for upgrade. Of that universe, 1% was under review with ‘developing’ implications.
Although the number of reviews for downgrades outpaced the number of reviews for upgrades by 4 to 1, Arthur Fliegelman, a Moody’s vice president and senior credit officer, says the actual number of companies is relatively small.
The report says the average financial strength rating for stock insurers is ‘A1′, 2 notches lower than the average mutual insurer rating of ‘Aa2.’
Among the possible reasons for this, according to Fliegelman, are that there is a natural inclination for mutual insurers to be more conservative given their customer base and more traditional product offerings. “If you’re buying a life insurance contract, you are looking for stability,” he explains. Stock companies, on the other hand, have to answer questions relating to top line growth, he continues.
The report finds that while entire blocks of business are being sold, the sale of whole companies has waned from the late 1990s. But those sales are important, according to the report, because they “permit companies to improve their business position and profile in bite-sized chunks without the higher level of risk embedded in enterprise-wide acquisitions that require the integration and rationalization of an entire company.”
Financial supermarkets are being streamlined, Fliegelman says, adding that sales of VA blocks of business are not as prevalent as other blocks. One possible reason, he continues, is that there are regulatory and other issues associated with these products.
For both variable annuities with guaranteed living benefits and for no-lapse universal life products, Fliegelman says it will be “a very tough challenge” for companies to balance the market’s demand for these features with risk management measures. Companies will have to look at the products they are selling, the nature of their customers and the prices their peers are charging for similar products, he adds.
No-lapse UL pricing, according to Moody’s, uses 3 assumptions: interest rates; policy persistency; and, mortality.
Moody’s says it has concerns that many insurers are assuming interest rates will rise and that the lack of analysis by some companies on the effects of lower levels of interest rates, which could subject some companies to lower earnings or even losses.
Policy persistency is also priced with initial lapse rates in the mid-to-low single-digit range with the assumption that lapses will fall to 0 if the guarantee goes in-the-money. But Moody’s raised the issue of whether these lapse rate assumptions are low enough. In such cases, it says lower earnings or even losses could occur.
And, according to Moody’s many of these contracts are being sold to older age groups where there is limited actual mortality experience.