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Life Insurers Are Giving Up

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As interest rates have plummeted and lifespans have risen, life and long-term insurance companies are feeling the pinch. Some have elected to raise rates by as much as one-third, while others are reducing their product lines or exiting the business altogether.

A perfect storm of low returns
Things are particularly tough in North America. In the U.S., MetLife (NYSE: MET  ) was one of the first to throw in the towel, announcing two years ago its intention to stop selling long-term-care insurance. Earlier this year, Prudential Financial (NYSE: PRU  ) also decided not to sell this type of insurance to individuals, though it will continue to do so as part of workplace benefit programs.

To the north, Manulife Financial (NYSE: MFC  ) has raised premiums, as well as removing some life insurance products from its roster, and the Royal Bank of Canada has recently announced its plan to stop selling two types of life insurance and five varieties of long-term-care insurance. Sun Life Financial (NYSE: SLF  ) cut its losses in the U.S. last year when it decided not to sell life insurance here anymore, as well as other types of financial products, such as annuities.

It's not hard to understand why insurance companies are hurting. Long-term insurance products make insurers money as premiums coming in are invested to garner the best returns. Customers may pay premiums for decades until they collect, and although there are always some claims being paid out, companies price policies for maximum investment income benefits. With interest rates as low as they have been recently, the companies are earning less on their investments. Other concerns involve Dodd-Frank and the possibility for increases in some insurers' capital requirements. Finally, insurers did not foresee the extended low-interest-rate environment or the increase in costs of care when many of their policies were sold, and for companies that find it too difficult to obtain rate increases from regulators, it is simpler to shutter those units.

To cope, some companies, like MetLife, are turning to emerging markets in Asia for more of their revenue and cutting back their life insurance and annuities businesses to save money. Prudential is also expanding in Asia, having purchased two Japanese insurance units from AIG over the past year.

Fool's take
Not all companies are giving up. Genworth Financial (NYSE: GNW  ) has decided to stay and fight, betting on higher interest rates sooner rather than later. The company sees profits coming its way as competition fades away and baby boomers age -- and need nursing care.

Will insurers start selling policies again when in terest rates start to rise? I would expect so, but it may not happen for two or three years. By that time, the economy should be better and the regulatory landscape will be less of an unknown. Once long-term insurance products become profitable again, players will start coming back to the table. By then, Genworth should be a force to be reckoned with.

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Fool contributor Amanda Alix owns no shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of American International Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 19, 2012, at 4:32 AM, lipmaninsurance wrote:

    How do reconcile that Life insurance companies reported record high life sales with a 9% increase in May 2012 year over year?

    I like your premise that insurers need investment results to match their promises of guaranteed returns, but what I think you're missing is that Disability and LTC claims are sky-rocketing and it's affecting those companies more than they'd like to admit. As proof, check out the loss ratios of Workers Comp writers as their medical claims are through the roof!

  • Report this Comment On July 19, 2012, at 4:20 PM, MHedgeFundTrader wrote:

    Buried in the recently passed Dodd-Frank financial reform bill are massive financial rewards for turning in your boss. The SEC is hoping that multimillion dollar rewards amounting to 10%-30% of sanction amounts will drive a stampede of whistleblowers to their doors with evidence of malfeasance and fraud by their employers.

    If such rules were in place at the time of the settlement with Goldman Sachs (GS), the bonus, in theory, could have been worth up to $500 million. Wall Street firms are bracing themselves for an onslaught of claims, legitimate and otherwise, by droves of hungry gold diggers looking for an early retirement.

    Don’t count on this as a get rich quick scheme. Government hurdles to meet the requirement of a true stoolie can be daunting. The standard of evidence demanded is high, and must be matched with the violation of specific federal laws. Idle chit chat at the water cooler won’t do. Litigation can stretch out over five years, involve substantial legal costs, and often lead to a non-financial settlement with no reward.

    Having “rat” on your resume doesn’t exactly look good either. Just ask Sherron Watkins, the in house CPA who turned in energy giant Enron’s Ken Lay, Andy Fastow, and Jeffrey Skilling just before it crashed in flames. Nearly a decade later, Sherron earns a modest living on the lecture circuit warning of the risks of false accounting, and whistleblowing.

    The Mad Hedge Fund Trader

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