FEATURE

PUTTING THE LUCK BACK INTO ’13

GOODWILL IMPAIRMENTS ON THE RISE The fallout from the economic downturn is now biting into the goodwill measure on life insurers’ balance sheets. A number of third quarter reports at stock carriers have recognized impairments of goodwill — the value of intangible assets such as recognized brand, positive customer and employee relations, etc. — in assessing their financial results. When times are good, the goodwill factor is also good. But now, not. Fitch Ratings has noticed the trend, too. The Chicago ratings company puts the blame on “the challenging macro environment.” This has led not only to goodwill impairments, but also to negative deferred acquisition cost (DAC) unlocking, and other GAAP loss recognition associated with changes in long-term reserve assumptions, the ratings firm says. That’s accounting talk, but there is a reason to know about it: As Fitch puts it, these and factors are placing renewed pressure on U.S. life insurers that are struggling to rebound from the financial crisis. So, advisors and distributors, get ready. The next several months will likely not be a time when you’ll see multi-featured innovations in many life or annuity products. Instead, look for more tweaks of existing products, more paring back of bloated product lines, and perhaps some debuts of conservative designs that won’t put a serious squeeze on reserves.

– LINDA KOCO

“Our data has shown for years that people look to our industry for guarantees; this is how we have differentiated ourselves and carved out our niche in the savings space,” Kerzner said before turning to some sobering predictions. “There won’t be 30-year guarantees on term. A UL with guarantees may become something that is displayed at the Smithsonian.” He described the many pressure points on the industry, but he also pointed out that consumers bear the biggest impact. “At a time when more Americans are underinsured, or not insured at all, the products they want may be disappearing,” Kerzner said, warning of an impending storm for the industry at the Chicago meeting, just as Hurricane Sandy approached the East Coast. Low interest rates are the chief culprit in the pressure on products. Just when you think they can’t go any lower, rates find a new low. From an all-time high of 15.54 percent in 1981, interest rates have 20

tumbled down a 31-year slope to the historic low of 1.62 percent in September, according to Kerzner. This makes it difficult for careful investors, such as insurance companies, to make money. Even though the historically low rate has made insurance guarantees a relative bargain for consumers, companies cannot sustain those promises. That means they have to cut not only the return but also the duration of policies. The Hartford Financial Services Group said in 2010 if rates remained low, the company could expect to lose more than $130 million annually. After a few rough years, in 2012 the company sold its annuity business to Forethought, its

InsuranceNewsNet Magazine » December 2012

individual life division to Prudential and retirement plan unit to MassMutual. It’s an extreme example of what many companies are doing. This next year promises to bring more of the same, with fewer and stingier guarantees being offered and more companies exiting products altogether, with long-term-care insurance and variable annuities taking the biggest hits so far.

Regulation

A lot can be lumped under this category but each of these issues could be an article in itself. Because we were just on the subject of guarantees, it makes sense to look at an alphanumeric you will be hearing a lot more about in the next few months AG 38. That stands for the National Association of Insurance Commissioners’ Actuarial Guidance 38, which requires more reserves supporting no-lapse guarantees, starting Jan. 1. Many companies have boosted UL with secondary guarantees by double-digit percentages. At least one company, ING, has suspended sales. That hurts many producers and marketing organizations because those UL products have been a standard for years. They made a compelling message to consumers, particularly since the crash, because cash value helped save many families and businesses. The election also re-energized efforts to fill in details of regulations such as Dodd-Frank Financial Reform. Of particular concern is the fiduciary standard and the tug-of-war between commission- and fee-based practitioners. Susan Voss, the Iowa insurance commissioner who also oversees securities, said she is concerned about the fate of insurance regulation in Washington, D.C. “There is a lot of conversation at the federal level about all the financial systems, and when you have such

"A UL with guarantees may become something that is displayed at the Smithsonian.” - Robert Kerzner, LIMRA CEO