Lehman/A.M. Best Co. 2nd Annual Conference

"...The recent weakness in equity markets has taken its toll in new sales activity and numbers are down, in many cases, pretty significantly." Michael Albanese Group Vice President A.M. Best Co.

A.M. Best Analyst: Volatile Stock Market Threatens
Life Insurers

The economy and declining interest rates top the list of land mines threatening the health and well-being of life insurance companies. The volatile stock market has managed to erode the investment quality of some life insurers, which could become an issue if liquidity pressures arise, said Michael L. Albanese, group vice president for A.M. Best Co., which rates insurance companies.

"More importantly, the recent weakness in equity markets has taken its toll in new sales activity and numbers are down, in many cases, pretty significantly," said Albanese, the lead-off speaker at the second annual Insurance Conference held in New York on May 21 and 22, cosponsored by Lehman Bros. and A.M. Best Co.

Other looming land mines include convergence, consolidation, demutualizations and tax-advantaged products--an area where sales have been hurt because of uncertainty over the proposed phase-out of the estate tax, Albanese said.

He also sees possible pitfalls in the realm of equity-indexed annuities. "Our question is, is this potentially the next market-conduct probe?" he asked.

All in all, he noted, the ratings outlook for life insurers is generally negative, a result of many factors including continued pressure on margins, very high distribution costs, existing slow growth and low returns.

Also, on the retirement savings front, "insurance companies have been losing ground" in their estimated market share of 401(k) assets, with mutual fund companies the clear beneficiaries of the hitherto strong equity markets, Albanese said. But this could change depending on interest rates, the behavior of the current equity markets and "whether things like advice and guarantees come back in vogue, particularly with what had been good results in the financial-planning environment," he added.

In terms of retirement savings, the ratings outlook for life companies is stable. Albanese cited such influential macro trends as favorable demographics and the shifting of responsibility for retirement savings from corporations and the government to individuals--"very strong positive influences over the sector," he said.

Regardless of the segment that an organization competes in, however, there are certain common traits that investors should consider before investing in a life insurer, Albanese said. These include:

-- companies that are customer-centric, that "are really trying to position the business to provide solutions and not just push products;"

-- brand, a factor which is becoming much more important;

-- scale;

--- use of technology, with an eye to making it easier for clients and distributors to interact with their company; and

-- a focus on financial and risk management.

(By Barbara Bowers, senior associate editor, Best's Review: Barbara.Bowers@ambest.com)

View The Powerpoint Presentation