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Low rates squeeze disability insurers

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Insurers have entered Disability Insurance Awareness Month 2016 (DIAM) while they are locked in a fierce battle with low interest rates.

Executives at Unum Group Corp. (NYSE:UNM) talked a little about the effects of low rates recently during a conference call with securities analysts.

Rick McKenney, Unum’s president, told the analysts that Unum increased group disability premium revenue during the quarter but suffered from a drop in sales. “It’s an area where we will continue to disciplined,” McKenney said. “We will continue to take pricing actions where we see it needed.”

See also: The importance of disability insurance: One agent’s first-person tale

When an insurer manages a block of group short-term disability (STD) insurance, it collects the premiums at one point in a policy year, then pays cash out for a few months later in the year to enrollees who file claims. Because the money comes in and goes out so quickly, interest earnings have little time to accumulate.

In the group long-term disability (LTD) insurance market, the insurer usually collects premiums at one point in a policy year and starts paying benefits to the insureds who file claims later in the same year. But the benefits period for an LTD insured could last many years. A 25-year-old who filed a claim today could still be collecting benefits in 2056.

Executives from StanCorp Group Inc. (NYSE:SFG) used to give analysts some details about the effects of interest rates on their group LTD operations every quarter when they went over their earnings. Meiji Yasuda Life Insurance Company of Japan took StanCorp off the list of companies that do quarterly earnings calls with securities analysts by acquiring it.

Another insurer, Hartford Financial Services Group (NYSE:HIG), gave a little information about its group disability operations when it released its first-quarter earnings, but only a little.

Hartford recorded $84 million in new group disability sales in the latest quarter on $352 million in group disability premiums, compared with $123 million in new sales on $354 million in premiums in the year-earlier quarter. The company did not say much about its disability operations in its earnings release or its earnings call, but it said its average investment yield fell to 4 percent, from 4.5 percent a year earlier.

Unum gives details about its disability insurance operations in quarterly financial supplements.

Unum as a whole reported $211 million in net income for the first quarter on $2.7 billion in revenue, compared with $213 million in net income on $2.6 billion in revenue for the first quarter of 2015.

The Unum US group disability unit generated $70 million in net income for the quarter on $732 million in revenue, compared with $74 million in net income on $702 million in revenue in the year-earlier quarter.

But net investment income fell to $121 million, from $125 million.

The effects of low rates on a large closed block of individual disability insurance were so severe that the company increased the loss ratio for the block to 84 percent, from 80 percent a year earlier. The new loss ratio reflects the effects of an increase in bond calls and bond tenders on future portfolio yields.

McKenney emphasized during Unum’s earnings call that the company’s core businesses are still profitable.

“It can be challenging in today’s low interest rate environment to continually move price increases into the market, but our teams are doing a good job of managing the balance required between generating top-low growth and maintaining profit margins,” McKenney said.

See also: 

Disability Insurance Awareness Month starts Monday

7 time-tested disability insurance sales tips


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