Limra CEO Says Market Downturn, Interest Rates Will Spur Companies to Sell Off Assets
April 10, 2012 by N/A
Best’s News Service – April 09, 2012 04:13 PM
Limra CEO Says Market Downturn, Interest Rates Will Spur Companies to Sell Off Assets
OLDWICK, N.J. – As companies re-examine where to put their capital, many will continue to sell off pieces that aren’t profitable, according to Robert Kerzner, president and chief executive officer of Limra, Loma and their parent organization, LL Global. Kerzner also spoke to Senior Associate Editor Fran Matso Lysiak about the new climate in the life industry, from the impact of low interest rates to a state of flux surrounding taxation.
Q: Since the financial crisis and resulting stock market crash in 2008, life insurance companies have been careful with their capital. Where will companies start to deploy their capital as the economy starts to recover?
A: When you and I spoke at the beginning of the downturn, I predicted that you’d really see a material change that would be ongoing about how companies would view capital. And that, in fact, has happened. Companies are making decisions about where they want to put their capital, and it’s different. It’s affected a little bit by whether they’re Canadian or European, because the new higher reserves that those countries require is forcing some companies to re-evaluate what businesses they want to be in. In fact, that’s why you’re seeing so much change, so much transformation and you will continue to do. Companies are deciding ‘I don’t want to be in this business. I do want to be in this business.’ And you’re going to start to see other companies start to sell off pieces of their business that aren’t key to their long-term plans.
Q: What are the short- and long-term implications of low rates on life insurance companies?
A: Well, low interest rates are really a problem for life insurance companies for a lot of reasons. The first reason is it affects profits. Part of what life insurance companies assume is that there’s going to be a spread on what they earn and what they pay clients. When you think about how low rates are, there are no spreads. So that’s the first problem. The second problem is many contracts have assumptions of what the clients is guaranteed. Current interest rates are actually lower than many of those guarantees. The third reason is that if you look back at ’09, life insurance companies had $325 billion in commercial and residential mortgages. We’re a big lender to both the commercial and residential sector. So you want there to be a lot of dollars available to stimulate growth and at these returns companies are going to be less willing to invest. But if you think about it, it’s even tough on consumers. Think about retirees on a fixed income who may have planned for 4 or 5% rate of return on their portfolio and now they may be seeing far less than that.
Q: In your view, what are the biggest regulatory or legislative hurdles that companies are up against in the next 12 to 24 months. Here I’m referring specifically to Dodd-Frank, the U.S. financial services regulatory reform law of 2010.
A: You know, I think there are so many things on the regulatory and legislative front. Certainly what companies are going to focus a lot upon is any proposed changes in taxation — either at the company level or on our products. And those are going to be the ones that have the most attention. But when you think about it, really the bigger impact is the uncertainty. It’s coming at companies now from all ends — from state, from federal, unexpected things like unclaimed property, that had not been in the regulatory mix. So I think there’s a lot of focus and a lot of resources on just looking at what’s coming next. Once those things are passed, then you have to gear up and get ready for them. But I think overall this is really affecting and hurting growth. Companies are having to focus far too much on dealing with regulatory change. And when you think about it, what markets and businesses hate most is uncertainty. Right now we have tremendous uncertainty.
Q: Recently several companies have pulled back from the stock market-based variable annuity market. What’s your outlook for this segment of the industry?
A: Well, I think that while there’s a lot of talk and a lot of people are focusing on companies that have withdrawn. In fact, if you really look at it, we have 10,000 Americans a day reaching age 65. We have people who have not saved enough for retirement and there are a lot of statistics on this. So I think that when you really look at the long term, it’s pretty logical that annuities have to be part of the solution. And certainly when you ask about where growth is going to come from, life insurance companies are going to look at those people looking ahead — boomers and X and Y — how will they save for retirement. And that means accumulation businesses are going to be key. And so I think you’re going to continue to see annuities be an important part of the business, but I also think we have to have a reset of what benefits they can offer and so the product of the next six, 12 months may look different than the product two years ago, but I think what annuities offer, both the tax deferred growth, but also that payout monthly in retirement, is still going to be important and as companies exit the market, other companies will honor. But we’ve got to get to a reasonable expectation
level by the broker and the consumer of what benefits and guarantees are available.
Q: That one company recently was Hartford Financial. They said they’re placing their U.S. individual annuity business into runoff and pursuing sale or other strategic alternatives for its individual life insurance and retirement plan businesses, among other things. Can you give me your take on what Hartford Financial did or how did that impact on the industry?
A: Well, while we can’t specifically talk about individual companies, it’s really back to this issue we spoke earlier about capital. And the fact is that their board apparently decided that they wanted to be more of a pure property and casualty play, but again I think it’s just a redeployment of capital to decide not to be in the life and retirement business. BN-NJ-04-09-2012 1613 ET #
