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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.
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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