Is Life Insurance Going Under?

In general, the ratings services seem to think it will.

Generally, the ratings services look at the industry's financial health in terms of invested assets, cash reserves and the like, and not so much at sales. But observers note that consumers are less likely to put their bets in terms of life insurance and annuity contracts on firms with shaky finances. So ultimately, the opinion of the rating agencies have a significant impact on sales.

Fitch Ratings in early September upgraded its outlook for the U.S. life insurance sector to stable. That came two years after Fitch gave the industry a negative outlook due to unease among its researchers over the weakening in the credit and equity markets and the likely impact that could have on the industry's capital, earnings and liquidity.

A stable outlook means Fitch expects to affirm ratings for the vast majority of life insurers over the next 12 to 18 months.

Commenting on LIMRA's findings, Douglas Meyer, managing director of Fitch, says it makes sense for the industry's sales to rebound from the significant stresses on the financial markets in the first half of 2009.

Policy ownership is down because a number of families felt they had to drop their policies due to other pressing financial concerns, Meyer believes.

Fitch upgraded its outlook for the industry because carriers generally performed well throughout the financial crisis in comparison to other financial institutions and went into the crisis equipped with a strong capital base, Meyer says.

"The profile of the industry is fairly stable and will continue to be so throughout the financial crisis," Meyer says. "We felt going into the crisis the industry would be affected by the downturn, so ratings broadly would be impacted. But they were relatively limited, with downgrades of one or two notches, and that's been case for the last two years."

In that time, Fitch downgraded 35 of 55 companies it rates, upgrading only Lincoln Financial, Radnor, Pa., and Unum Group, Chattanooga, Tenn.

Its rating action on Lincoln National followed the company's announcement in June that it had repurchased all of the $950 million of preferred shares issued to the U.S. Treasury under its Capital Purchase Program (CPP) in June 2009.

Fitch upgraded Unum because the company took some steps to reduce risk in its investment portfolio and because its business is concentrated in employee benefits and group life, where sales results held up well, Meyer says.

For the industry as a whole, Meyer believes individual life insurance sales in the near future will be led by traditional agent channels, independent as well as career, due to an uptick in recruiting in the past year.

"You typically see that in a downturn," Meyer says. "Life insurers try to be more selective when there are more people looking for a job, some of whom are considering changing careers to life insurance sales."

That increase allows companies to be more selective in hiring agents, he notes.

[In a recent announcement, New York Life Insurance Co. said it is aiming to hire more than 3,000 agents to meet an increasing consumer demand for life insurance. The company said it has seen a 47% increase in individual life insurance sales for the first six months of the year compared to 2009.]

Meyer expects in the near term Fitch will affirm life insurer ratings at current levels, while downgrades should slow.

"Downgrades could still outnumber upgrades, but both those numbers will not be changing much in next year, and the industry has performed well in the crisis," he says.

Mayer also believes that it makes sense that the industry will experience a sales rebound from the significant stress in financial markets in the first half of 2009.

Standard & Poor's Ratings Services, New York, announced Sept. 13 it continues to maintain a negative outlook on the U.S. life insurance industry.