FitchOutlookDec13jc

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The North American life insurance industry is on ‘stable’ footing as it sprints into 2006, according to a Review and Outlook prepared by Fitch Ratings.

Actually, the industry has run an even time since 2002 when it was assigned the ‘stable’ outlook.

What is occurring and what will assist the life insurance segment in maintaining its stable footing is consolidation, according to Julie Burke, managing director in Fitch’s Chicago office.

Consolidation will result in “larger, more diverse companies” which “will be better able to survive in various economic and market environments,” she added during a recent conference call to discuss the report.

Because of the expected consolidation, transactional upgrades are expected, according to the report. Without consolidation, the report says that downgrades will continue to outpace upgrades over the next 12-18 months.

Scale is needed, she explained, because unit costs are driven down, and companies are able to exert more control in areas such as shelf space with distributors and investment management, she said. It will also make it possible for companies to invest more in technology, she continued.

While consolidation does not preclude the continued existence of niche companies, there will be challenges for those companies, according to Burke. Consequently, going forward, there could be a divergence in credit quality among insurers, she added.

The report also notes that the industry has tended to compete on product price and structure. Although this is not a bad thing, it continues, the tendency is to underprice and overstructure.

Other findings in the report are as follows:

==Although the group life market is “very competitive,” carriers benefit from high barriers to entry and a consolidating market. The top 5 and top 10 carriers account for 46% and 70%, respectively, of group life issued in 2004.

==regulatory oversight will impact sales of equity-indexed annuities and variable annuity sales growth;

==payout annuities may gain in popularity and that shift may mean a loss of liquidity for the consumer and producer.

Douglas Meyer, senior director with Fitch, addressed findings in Fitch’s review and outlook report for the U.S. health insurance and managed care industries.

Meyer says that the outlook has been raised to ‘positive’ from ‘stable’ because of stable operating earnings, improvements in balance sheets, and a lack of any negative legislative, regulatory or legal trends.

Trends that Meyer detailed include:

==potential new revenue from Medicare Part D that could reach $20-25 billion in 2006;

==the possible consolidation of smaller regional plans by larger, national plans; and,

==the increasing cost of medical care.

In fact, Meyer says that this trend could have a destabilizing impact on the U.S. health care system and is a major factor in driving the increase in the uninsured population.

This inability to reduce costs, he added, increases the potential for government to address health care access and affordability issues. And, Meyer continued, at the state level, there is also increased scrutiny that could lead to an increase scrutiny of premium rate filings in states.

Consolidation will help insurers weather any tough times