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Steeled by a difficult 2001, insurers should fare well this year with pricing an important factor in determining success, according to a number of industry experts.
A report from Moody's Investors Service in New York states that despite a recession and the events of Sept. 11, the United States life insurance industry will remain stable during 2002.
Patrick Finnegan, a senior vice president with Moody's, says direct writers will benefit from mortality improvements. "Maybe they have been leaving some money on the table with reinsurers and they won't have to cede as much business," he says.
Over the next decade, mortality should continue to improve and insurers can earn returns on business that would otherwise be ceded, he adds.
While a positive for the industry, Moody's cautions in its report that aggressive pricing of products based on improved mortality makes good underwriting more necessary and could have a negative impact on the industry if mortality does not improve as much as some have predicted.
Other predictions offered by Moody's analysts suggest: consolidation as well as a stable ratings outlook supported by such factors as sound asset quality, predictable and strong premium flows, and low financial and operating leverage.
Consolidation, according to the report, will be driven by slower revenue growth that has driven equity valuation of small to mid-sized insurers, a growth rate that will make them more attractive takeover targets.
Finnegan says the pace of consolidation will not necessarily be fast unless companies misstep. "If a company stubs its toe" by losing the loyalty of its distribution force or taking a large capital charge, then being acquired is something that could come more quickly, he adds.
The need for retirement products is a mixed blessing, the report says. There has been rapid growth of sales of accumulation products, but competition among players has also increased, the Moody's report continues.
Scale matters in this market, particularly in areas such as variable annuity sales, according to Finnegan.
Demutualization will be affected by interest rates, he continues. If interest rates remain high and stable, mutual companies will be able to pay policy dividends and survive, he says. But if they go very low, more companies could demutualize, Finnegan adds.
Julie Burke, a managing director with Fitch Inc., a rating agency in Chicago, says that if consolidation does occur in 2002, it could be through purchases of distributors.
The interest in buying asset management operations may have cooled for the time being because of the volatility that the equity market is experiencing, she adds.
Ironically, that volatility may have brought down the price of asset management operations, Burke says.
For insurers who bought asset management operations at their peak valuations four to five years ago, new accounting rules with stricter impairment requirements may be reflected in income statements. Goodwill accounts for the perceived value of a company over and above the actual value of its tangible assets.
For most companies, however, ratings already reflect goodwill paid, she adds.
The demand for life insurance may pick up following 9-11, Burke says.
The increase in demand could, in certain instances, be offset by credit losses, she adds, noting the Enron bankruptcy and Argentina's default on debt obligations. She says insurers could face charges on collateralized debt obligations, or pools of securities. Additionally, insurers may face spread pressure on minimum credit guarantees resulting from low interest rates, Burke says. Companies have several choices and rating agencies will need to look at those choices, she adds. They include: taking a charge to earnings, buying assets of longer duration or buying securities with lower credit quality.
