By Leslie Scism
U.S. insurers are doing the once unthinkable, turning away
business from some Americans who want a life-insurance policy.
The driving force behind the action: a collapse in interest
rates tied to the spread of the new coronavirus and an expectation
from insurers that rates won't rebound significantly anytime
soon.
Life insurers earn much of their profit by investing customers'
premiums in bonds until claims come due. In simplest terms, when
they price policies, they make assumptions about how much interest
income they will earn investing these premiums years into the
future. The less they earn, the more they may need to collect in
premium or fees to turn a profit.
For now, a wave of stopgap measures is hitting potential buyers.
In addition to suspending sales of some popular products and
raising prices, insurers are also scaling back policy sizes and
reducing benefits.
"In 33 years, I have never seen more changes come more quickly
to the life-insurance products we sell," said Lawrence Rybka,
chairman of ValMark Financial Group, an insurance brokerage in
Akron, Ohio. "It is unprecedented how fast and widespread -- it is
across lots of carriers."
His staff has had a hard time keeping up with insurers'
bulletins, and they have less time to redirect business to insurers
still willing to issue certain types of large policies, he said.
Historically, insurers would give a month or 60 days before a
change became effective. Now, two weeks is common.
Some insurers are reacting directly to the new coronavirus.
Penn Mutual Life Insurance Co., among others, has temporarily
halted life-insurance sales to people 70 and older and who are in
poor health. Insurance-industry executives say that analysis shows
older people with underlying medical problems are dying at much
higher rates from Covid-19 than younger people.
In a memo to brokers, Penn Mutual said it expects "to revisit
these and other changes as we gain better insight into the impact
of the Covid-19 pandemic."
Among those prompted to move quickly amid the changes was David
Hungerford, 72 years old, who bought a $1 million policy from
Prudential Financial Inc. last month.
Mr. Hungerford, an owner of a package-design company in southern
California, said his broker advised him to act fast because of
looming premium hikes. Calling life-insurance buyers "collateral
damage" of ultralow interest rates, he said he hustled to wrap up a
medical exam.
"I was concerned about my overall bucket of assets in the stock
market, and I wanted another bucket to depend on" for his wife's
financial protection, he said about his desire to purchase the
policy.
Prudential, the nation's biggest life insurer by assets, told
brokers in a March missive that its late-April rate increases of 8%
to 12% on the type of policy bought by Mr. Hungerford, and other
actions, "put us in a much better position to withstand the low
interest-rate environment."
The insurer also temporarily suspended sales of 30-year
"term-life" policies, an offering popular with young families, a
spokeswoman confirmed. Such policies provide a basic death benefit
during the years in which they rear their children. Prudential also
reduced the amount of interest it is crediting to certain
combination savings-and-death-benefit "universal life"
policies.
Typically, life insurers hold about 70% of their general
investment account in long-term bonds. In general, the yields on
these holdings, many of them corporate securities, follow the
10-year U.S. Treasury. Its annual yield has been mostly declining
since the 1980s, when it peaked at nearly 16%.
The yield dove after the 2008-09 financial crisis and was as low
as 1.366% in 2016 before rebounding to about 3% in 2018. In March,
it plummeted again as coronavirus sparked a rush to safer assets
and investors feared interest-rate cuts from the Federal
Reserve.
The yield on Friday: 0.679%.
Corporate-bond yields have held up better than the 10-year of
late, but the overall trend has been tough on life insurers. Life
insurers' net portfolio yield averaged 4.4% last year, down from
9.9% in the mid-1980s, according to ratings firm A.M. Best Co.
Some insurers now are turning away business they consider the
riskiest. American International Group Inc., Nationwide Mutual
Insurance Co., Pacific Life Insurance Co. and Principal Financial
Group Inc. are among big insurers that have limited the size of
so-called guaranteed universal-life policies, which are highly
sensitive to low interest rates.
The guarantee is a promise that the annual premium bill won't
ever increase during the owner's lifetime. That means the insurer
is on the hook for any shortage of interest income over the years.
Consumers bear the risk of premium hikes in other types of
universal life to make up for such shortfalls.
A Nationwide spokesman said the insurer's pricing and product
adjustments were motivated by "the extremely low interest rates and
market volatility that drives up the cost of our hedging
instruments, and [the] evolving landscape related to Covid-19."
Mark Chandik, president of FDP Wealth Management in Irvine,
Calif., said many carriers held off raising prices and retooling
offerings immediately after 2008-09 on a belief that rates would
soon edge up. They gradually made changes when low rates persisted
for years.
In this crisis, "they see no end in sight and they are all
rushing to react to that," he said.
Over the past decade, life insurers offset some earnings
pressure by deploying money into higher-yielding, triple-B debt,
but potential downgrades in the worsened economy may make some
insurers pause, said Tracy Dolin-Benguigui, a senior director for
North American Insurance Ratings at S&P Global Ratings.
Certain insurance products that pay interest to consumers will
experience a meaningful decline in sales, she forecasts. "It
becomes extremely hard to provide a decent multiyear guarantee when
you are facing the prospect of zero or even negative rates," she
said.
In another example of how low interest rates are being passed on
to consumers, payouts on "income annuities," also known as
"immediate annuities," have dropped 24% since 2005, industry
figures show. A 70-year-old man investing $100,000 into one of
these contracts for lifetime payments would get $556 a month today,
down from $730 a month in 2005.
Some industry executives are hopeful one positive outcome of the
Covid-19 turmoil is a greater appreciation for life insurance.
"The superlow interest rates today are certainly not good for
Americans looking to save nor broadly for the life-insurance
industry, but the value of protection products with guarantees will
increase in this unpredictable environment," said Theodore Mathas,
chairman-elect of trade group American Council of Life Insurance
and chief executive of New York Life Insurance Co.
Some insurers have had strong recent activity. Haven Life, an
online unit of Massachusetts Mutual Life Insurance Co., for
instance, reported a 42% jump in term-life sales in March.
Sales at some companies also have been lifted by buyers trying
to get ahead of product-change deadlines.
Alan Boudreau, a 51-year-old owner of an infrastructure
pipe-laying business in southern California, said he was "a little
leery" about committing in March to a multimillion-dollar policy,
with Covid-19's economic damage unfolding.
"I was dragging my feet," he said. But with changes ahead, "we
decided it was smart to move forward now rather than to wait for
down the road."
Write to Leslie Scism at leslie.scism@wsj.com
(END) Dow Jones Newswires
May 10, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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