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NALC What's New... Read the latest NALC publications: In the News
Upcoming Meetings Save the Date!2010 Fall ConferenceSeptember 22 –
24, 2010
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Business as Usual?The negative effects of the financial crisis have receded, but life insurers still face challenges.(By Robert Stein, Vice Chairman of Global Financial Services for Ernst & Young; robert.stein@ey.com) As we consider how the life industry will fare in 2010, first-quarter earnings are giving a glimpse at the challenges in store for the industry in the months ahead. These reports suggest that while many of the more damaging aspects of the crisis have eased, some issues are lingering and continue to pose serious challenges. A few are even getting worse. So when will it be back to business as usual? Earnings, which began stabilizing late last year, should continue their slow improvement in 2010, but not without some surprises. Already it appears that impairment charges may remain at elevated levels as troubled assets (remember, they largely remain on-balance-sheet, and unrealized losses will have to be dealt with sooner or later) slowly get resolved and as emerging commercial real estate issues replace residential loans as the problem investment. An important asset class for many insurers, commercial mortgage-backed securities and direct loan delinquency rates are expected to double by the end of the year, reaching 10% and more, way above the 1% to 2% historical delinquency rates. With hundreds of billions of loans needed to be refinanced in the next few years, increased losses seem likely. In the end, earnings per share are likely to show strong year-over-year gains (coming off very weak prior-year results), but will remain weaker than pre-crisis levels by as much as 20% to 25%. Perhaps more important will be the industry’s ability to restart sales and revitalize distribution systems shaken by the production declines in the last few years. Industrywide variable annuity sales, an industry mainstay for years, remain depressed, a victim of more risk-averse markets and aggressive product redesign and repricing. Life sales, too, remain off pre-crisis levels at most companies, often by as much as 20% and more. And while fixed annuity sales surged in 2009 as customers sought a safe haven for funds, 2010 sales have not kept pace. The need to increase production levels has many companies focused on building distribution capability, a costly exercise in the best of times, and exploring all alternatives for increasing producer productivity. At the same time, many companies will be focused on managing New York’s new compensation disclosure requirements, due to take effect Jan. 1, 2011. Likely to lead to wholesale disclosure of producer compensation and benefits, this could trigger similar actions in other states. These requirements have generated considerable debate about their immediate and longer-term impact on sales, but one thing seems clear. Coming into effect just as the industry is slowly emerging from a period of serious distress, and while consumers’ financial condition remains very fragile, their immediate effect seems likely to make a return to higher sales levels even more challenging. These long-term investments in building a more transparent and productive sales force are crucial, but they may not pay off in time to salvage 2010 earnings. The industry will be tackling many other issues in 2010, making it another trying year; responding to the lack of efficient sources of capital to support XXX and aXXX (reserving) needs and managing the planned changes to GAAP accounting for insurance contracts are just two. Back to business as usual? I don’t think so.
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