Conning: Investment Losses Will Continue for U.S. Life/Annuity Industry in 2009
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June 24, 2009 Wednesday 04:32 PM EST
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Conning: Investment Losses Will Continue for U.S. Life/Annuity Industry in 2009
Fran Lysiak
HARTFORD, Conn.
Realized and unrealized investment losses will continue to be a problem for the U.S. life insurance and annuity industry this year as it's already seen big declines in assets and surplus as a result of the financial crisis of 2008, according to a report by Conning Research and Consulting.
Preliminary results for 2008 indicate that the life insurance industry had a statutory net loss of $51 billion, 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 realized and unrealized capital losses will continue to challenge the industry at least through 2009," he said.
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. They're taking 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 stock market-linked annuities to ensure they can deliver on the guaranteed future payments to policyholders.
The industry, according to Martin, will show a net statutory operating gain in 2009, but it will be "far below the robust levels of 2003 through 2007."
Last September, A.M. Best Co. revised the outlook on the U.S. life/annuity segment to negative from stable, citing uncertainty in the future direction of the economy, real estate values, interest rates, equity markets -- both domestically and globally -- and liquidity. Areas of emerging investment risk cited included several previously stable investment classes -- commercial mortgages (both direct loans and securitizations), asset-backed securities (e.g., credit card receivables and automobile loans), alternative investments (such as limited partnerships and hedge funds) and prime residential mortgage-backed securities.
"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 favorable," said Stephan Christiansen, director of research at Conning, in a statement. This includes 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," he said.
Stein also offered some bright spots, noting market conditions have improved since late last year when several life insurers applied for financial aid under the U.S. 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 "when the economy was really headed into a nose dive and equity markets were cratering," he said.
Another industry expert recently provided similar commentary. While the recession technically may end later this year, the industry will face economic weakness well into 2010 and along with that, "a prolong period of exposure to credit default issues," Robert Stein, global leader for actuarial services at Ernst & Young, told BestWire. Credit risk and default issues have supplanted equity market exposure as the biggest financial instrument risk to the industry. Equity markets have stabilized, and companies have accessed the capital markets, Stein said (BestWire, June 18, 2009).
(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])
June 25, 2009
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