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3 insurance industry views from Moody's windows

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Moody’s Investors Services brought reporters to its offices in downtown Manhattan Wednesday to explain how its analysts see the insurance world.

Moody’s and other rating agencies are still recovering from the firestorm of regulatory scrutiny they passed through during the Great Recession.

But what analysts at the firms think can still have a big effect on insurers, producers and customers, because the firms’ ratings influence how much insurers pay to borrow money, whether insurers can borrow money, and whether insurers are viewed as being stable enough to write products that may pay off far in the future, or may pay benefits over long periods of time.

The rating agencies can also affect insurers’ investment yields. by influencing what other entities, including the U.S. Treasury, pay when they borrow money. 

See also: Moody’s Places U.S. Aaa Government Bond Rating and Related Ratings on Review for Possible Downgrade

For a look at three drivers Moody’s insurance analysts can see outside their office windows, read on.

Riegel and Levine

1. Big construction projects.

It’s hard to take a picture in a Moody’s conference without a crane growing out of someone’s head.

Cranes are soaring all over southern Manhattan, and in many other real estate markets around the world, because the commercial real estate market has been doing well. The construction business is booming.

Joel Levine and Robert Riegel, Moody’s insurance analysts, mentioned real estate when talking about how U.S. life insurers have been doing at a time when interest rates on the kinds of high-grade corporate bonds they favor have fallen somewhere near the center of the earth.

“The life companies have managed through the low interest rate environment pretty well,” Riegel said. “Probably better than we expected.”

Life insurers have kept breathing in spite of the lack of interest yield air flow thanks, in part, to the help low rates have given to stock prices; to the fact that most bond issuers have made their payments; and income from alternative investments, Riegel said.

Levine said high stock prices have helped by increasing the amount of asset-based income coming from products such as variable annuities, and by reducing the amount life insurers have to pay to make good on the minimum guarantees associated with annuity products and other stock-linked products that offer guarantees.

The alternative investments helping life insurers include allocations in emerging markets, in private placements, and in the kinds of real estate-related asset classes that may lead to cranes rising up over Manhattan.

The level of allocation in alternative investments “is well within the normal bounds,” Levine said.

But life insurers are assuming more risk than they were willing to assume in the years right after the Great Recession, Levine said.

See also: For Investors, Playing it ‘Safe’ can be Risky

Image: Robert Riegel and Joel Levine (LHP/Allison Bell)

Dove wings over a new train station

2. Two wings that can’t flap.

Moody’s analysts who are looking out the right windows can see construction crews working on a new World Trade Center transit hub designed by the architect Santiago Calatrava. Calatrava wanted the roof to have two dove-like wings that could open up to the sky.

Instead, because of cost overruns, the wings will be fixed in place. The wings can’t fly.

Right now, Moody’s analysts are tracking a long list of proposed life and health deals, including some featuring acquirers from Japan, and even from China, that are scooping up U.S. insurers. Many of the buyers are out shopping because of worries about how sluggish home market economies will affect their ability to grow, Levine said.

The volume of deal money coming out of China could grow substantially, because the biggest Chinese insurers have not yet announced any major U.S. deals, Levine said.

See also: M&A among insurers pegged at $200 billion-plus thru 3Q 2015

Simon Harris, global head of insurance and managed funds at Moody’s, said his company thinks many of the proposed deals look good, because the deals seem to be a great fit for the acquirer, the acquirer is paying mainly with stock, or both.

Will the new deals fly, or will the wings get stuck?

In the 1990s and early 2000s, European and Canadian insurers announced a wave of big U.S. deals.

“I don’t want to call it a failure, but it was not a success,” Riegel said. In some cases, he said, the acquirers “did not get their money back.”

Harris acknowledged that the results of big life deals have been mixed. “It comes down to price, and when you buy,” he said.

Image: The roof of the new World Trade Center transit hub (LHP/Allison Bell)

September 11 Memorial site

3. The National September 11 Memorial site

Moody’s offices are in a building in the World Trade Center complex, and they overlook a grim reminder of how quickly the world can change: the fountains that stand where the Twin Towers used to be.

Sarah Hibler, a property-casualty analyst, and other Moody’s analysts talked about a growing, potentially world changing kind of risk: cybersecurity risk.

See also: What every independent agent needs to know about cybersecurity

One question was whether cybersecurity risk itself might, at least in some cases, be considered a form of terrorism risk.

“It’s very difficult to underwrite,” Hibler said. “The parameter risk around these models is pretty significant.” 

Analysts noted that, for insurers, including the health insurers hit by a wave of highly publicized breaches over the past year, one of the hard-to-quantify variables is reputational risk: Will customers continue to do business with the insurers affected by breaches?

Image: The National September 11 Memorial site (LHP/Allison Bell)