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Life insurers scrape for yield

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The heads of two large life insurers said today that their companies are resisting pressure to take much more interest rate or credit rate risk to boost investment yields.

Roger Crandall, chief executive officer of MassMutual, and Ted Mathas, CEO of New York Life, talked about their companies’ cautious search for yield at a CEO panel at an insurance industry conference organized by Standard & Poor’s. Economists at an earlier conference session speculated about when rates might move higher.

Low rates on the investment-grade bonds and other highly regarded assets that dominate life insurers’ portfolios have hurt the insurers’ ability to generate the income needed to support products with long-term guarantees, such as long-term care insurance, long-term disability insurance and annuities with minimum benefits guarantees.

Some insurers and asset managers say insurers need to consider alternative investment ideas.

MassMutual is reluctant to invest in fixed-income investments that generate higher returns today but are more sensitive to shifts in rates, Crandall said. ”Betting on interest rates is a fool’s game,” the executive said.

Crandall and Mathas said their companies are also reluctant to shift toward buying more high-yielding, low-rated investments. The companies are trying to get better results without gambling in interest rates or borrower solvency by investing portfolio assets in deals that involve liquidity risk, or the need to lock money away for a specified period of time, the executives said.

“The big shift isn’t in portfolios,” Crandall said. “It’s in what liabilities look like.”

When rates are low, MassMutual avoids having to chase yield by offering consumers fewer long-term guaranteed, the MassMutual executive explained. Crandall argued that one factor that is exaggerating the effects of low rates and the recent Great Recession, especially on defined benefit plans, is pressure to move to “mark to market” accounting rules, or rules that may require insurers to value assets at current prices, even in a crisis in which the markets are functioning poorly.

The accounting at MassMutual, New York Life and Prudential Financial — another company with a CEO on the panel — has been good enough to get them through the 1918 influenza pandemic, wars and other hard times, Crandall said.

Now, he said, looming changes in accounting rules and in U.S. and international solvency standards are threatening life insurers’ ability to offer protection against long-term risk, Crandall said.

The result may be that Americans may have to get help with handling long-term risk from government programs, such as Medicare and Social Security, that have had problems with handling their own long-term risk, Crandall said.

Also at the conference:

  • John Strangfeld, Prudential’s CEO, said he thinks insurers will offer a broader array if simpler, more narrowly targeted annuities.
  • Mathas said competitors have had trouble reaching the middle-market, even as product prices have fallen, because they have trained too few agents. Low penetration “is not a price issue,” he said. “It’s a distribution issue.” New York Life is still successful at reaching the middle-market because it continues to train agents, Mathas said.
  • Tim Corbett, MassMutual’s chief investment officer, and John Mason, OneAmerica’s CIO, said they are afraid of a rapid increase in interest rates as well as of low rates. If rates rise too quickly, consumers could shift cash out of life and annuity products and into higher-yielding options.