Life insurers in the US repairing damage done by a global financial
crisis of unprecedented scale continue to face challenges posed by
realised and unrealised investment losses. Despite this, Conning
Research predicts that first signs of a profit recovery will be
seen in 2009. Charles
Davis reports.
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The US life industry is slowly emerging
from the greatest financial crisis in its history, but there is
still a long way to go. A new report from Conning Research and
Consulting underscores the difficulties continuing to plague the
market, finding that while long-term trends look favourable for the
life and health insurance industry, short-term challenges will
occupy the attention of senior management for the foreseeable
future.
Several large insurance companies have seen
significant decreases in assets and surplus, resulting in an urgent
need to raise capital at a time when capital markets are
constrained. Preliminary results for 2008 indicate the industry
posted a statutory net loss of $51 billion, and that ending surplus
in the industry dropped $41 billion or 13 percent last year.
Realised and unrealised investment losses will
continue to be a problem for the US life insurance and annuity
industry this year, said Terence Martin, an analyst at Conning, in
a statement.
“Our latest forecast for the life-annuity
industry projects net operating gain to recover, but realised and
unrealised capital losses will continue to challenge the industry
at least through 2009,” Martin said.
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By GlobalDataThe report documents the scope of the
financial disaster, noting that throughout 2008 and continuing into
the first quarter of this year, many life insurers’ profits were
battered by big investment losses in their portfolios and the sharp
volatility and declines in the stock markets.
US insurers continue to take millions in
charges on deferred acquisition costs on their variable annuity
businesses and higher costs for hedging against risks associated
with the guarantees offered to policyholders on these
retirement-income products. Companies also are increasing reserves
on these equity market-linked annuities to ensure they can deliver
on the guaranteed future payments to policyholders.
Operating gain recovery
According to the report, the life
industry will show a net statutory operating gain in 2009.
“Our latest forecast for the life-annuity
industry projects net operating gain to recover, but realised and
unrealised capital losses will continue to challenge the industry
at least through 2009. While the industry will show a net statutory
operating gain in 2009, it will be far below the robust levels of
2003 through 2007,” Martin wrote.
Areas of emerging investment risk cited
included several previously stable investment classes – commercial
mortgages (both direct loans and securitisations), asset-backed
securities (for example credit card receivables and vehicle loans),
alternative investments (such as limited partnerships and hedge
funds) and prime residential mortgage-backed securities.
Conning predicts more stable rates of premium
growth through 2011 based in part on demand stimulated by estate
planning, a focus on savings and more conservative protection
needs, and by a need for more stable investment alternatives.
The report notes that market conditions have
improved since late last year when several life insurers applied
for financial aid under the US Treasury Department’s Capital
Purchase Program, part of the $700 billion Troubled Asset Relief
Program. The situation has changed quite a bit from late 2008 and
through the first quarter of this year, the report said.
Customer product preferences also shifted with
the changed conditions. Variable annuity sales decreased as
customers shied away from the increased market volatility, and
began favouring fixed annuities with their guaranteed returns. As a
result, assets moved away from the separate accounts and toward
general account investments. Existing assets under management also
shifted. Customers rebalanced their portfolios to limit their
exposure to the equity market. Some companies included rebalancing
features that made the same adjustments automatically.
Between 2009 and 2011, contributions to
general account reserves will continue as sales of fixed annuities
and life products grow, and some reserve additions may still be
required through 2009 to make provisions against in-the-money
variable annuity guarantees.
Return on surplus is projected to be 3.5
percent in 2009 and increase to 4.1 percent in 2011. Capital
leverage increased to an unprecedented 11.2 percent in 2008, and is
projected to slowly decrease to 9.9 percent in 2011, which is still
higher than at any time during the historical period. Returning to
a range of 8 percent to 9 percent will likely take several more
years, testimony to the severity of the severe hit the life
insurance industry suffered in 2008.
Conning forecasts that individual life net
premiums will decline 4 percent to $109 billion in 2009 but will
recover to $114 billion in 2011. Remaining sensitive to sales and
surrenders of non-US products, benefit costs are forecast to
decline from a high of $125 billion in 2008 to $123 billion in
2011.
The forecast shows sluggish growth continuing
with net operating gains after taxes and dividends of less than $7
billion in 2009, 2010 and 2011.
Brighter long-term future
The forecast assumes that the
economy stabilises in 2009 and improves in 2010 and 2011.
Nevertheless, sales will not come easy as consumers juggle
priorities, including saving for retirement in the midst of
difficult employment and housing markets.
Policy surrenders and lapses are likely to
remain high in the near term. Noting the increased cost of
underwriting older applicants and the pressures on baby boomers,
life insurers may find profitable growth requires reaching out to
younger generations.
“Despite possible negative short-term impacts
from some of the issues looming over the industry – such as the
need to rebuild capital and changing regulations – our longer-term
view of the life insurance industry is favourable,” said Stephan
Christiansen, director of research at Conning.
“We project that surplus plus AVR [asset
valuation reserve] will increase 23 percent to $337 billion by 2011
as the industry adapts to the new environment and due in part to
additional capital paid in to the industry. Additionally, we
forecast premium growth through 2011 based in part on demand
stimulated by estate planning, a focus on savings and more
conservative protection needs, and by a need for more stable
investment alternatives.”
