Worsening Economy Is Limiting Sales For Life Insurers Reeling From Claims
interactive.wsj.com
October 8, 2001
Worsening Economy Is Limiting Sales
For Life Insurers Reeling From Claims
By CHRISTOPHER OSTER
Staff Reporter of THE WALL STREET JOURNAL
As the life-insurance industry grapples with the large but manageable cost of paying out thousands of death-benefit claims triggered by the Sept. 11 terrorist attacks, the rocky stock market and risk of economic recession are putting further pressure on insurers.
Analysts say the life-insurance industry has ample capital to make good on all the attack-related claims. But the worsening of the economy is hurting sales of the most lucrative life-insurance products, and disability-income claims are expected to spike higher, as they traditionally do when the economy sours. Life insurers have enjoyed a steep jump in sales of term-life insurance after the attacks, but the increased revenue isn't likely to compensate for the adverse developments, and analysts are slashing earnings estimates.
"The operating environment for the life-insurance industry has been tough so far in 2001 and does not look to get any easier over the next few months," said Jason Zucker, a life-insurance analyst at Banc of America Securities. Mr. Zucker predicts the fourth quarter will be worse than the third quarter.
Insurance Rates Rocket Across Industries, but Unlike Airlines, Help May Not Come
Analysts predict that life insurers will pay $4 billion to $6 billion in claims related to the attacks, far less than the $40 billion or more that property-casualty insurers are expected to shell out. The steep bill for property-casualty underwriters already has led to a round of ratings downgrades, and more are expected. But $5 billion is a relatively small figure for the life-insurance industry, which paid out $44 billion in claims last year. The life-insurance industry has $3.1 trillion in assets and liquid reserves, and its capital cushion stands at $221 billion.
But the attacks' impact on the economy, and specifically the weak stock market, contributed to a 29% decline in life-insurance profits during the third quarter, estimates Nigel Dally, a life-insurance analyst at Morgan Stanley. Prior to the attacks, he had predicted 3% growth.
The stock market's poor performance makes it more difficult for life insurers to sell investment products like variable annuities and variable life insurance, whose returns are linked to the performance of stocks and bonds. "Some of the gloss is off the apple," said Sy Sternberg, chairman of New York Life Insurance Co., where variable-life sales have dropped by about 30% this year while sales of traditional whole-life policies are up. And when stocks skid and chip away at the value of the accounts currently held by customers, it also cuts into the management fees earned by the life insurers.
The newest worry is significantly higher-than-expected unemployment rates will lead to a sizable increase in claims for disability-income insurers. "With economists now agreeing that the U.S. economy is currently in a recession and with unemployment rates having risen dramatically, we have turned cautious on the outlook" for such insurers, Mr. Dally said in a recent report, noting that "claims and benefit ratios tend to rise in periods of higher unemployment."
The unemployment rate stands at 4.9%. Banc of America's Mr. Zucker said that further increases, to about 6%, "will have an impact." The reason, he said, is that if laid-off workers can't find other jobs, they're more likely to file claims that they otherwise wouldn't have. "You might wind up having a lot more subjective claims. Maybe people will say they're too traumatized to go back to work," he said.
Analysts also are keeping a close watch on insurers' investment portfolios. Joan Zief, an insurance analyst at Goldman Sachs, expects the insurers to fare better in the current downturn than they did following the recession of the early 1990s. "I think they've been much more careful," she said.
But some so-far-isolated problems are surfacing. American General Corp., Houston, recently acquired by New York-based American International Group Inc., said in July it had taken a $75 million pretax charge on its holdings of collateralized debt obligations. Lincoln National Corp., Philadelphia, announced a similar $17.3 million charge. (In the second quarter, American General posted a $312 million net loss -- partly related to merger charges -- and Lincoln National reported net income of $142 million.)
"That shows there's probably more risk in the portfolios that's below the surface," said Vanessa Wilson, an analyst at Deutsche Banc Alex. Brown. |
