Market rally helps life insurers, but some still struggle with old books of VA business, Moody's says

Although improving financial markets have helped lift some life insurance carriers, the firms still have a ways to go before they recover fully, according to a report from Moody’s Investors Service. The equity markets’ rally since March has taken some of the pressure off life insurance carriers that write variable annuities, according to the report from the New York-based ratings agency. Nevertheless, some insurers are still having problems with old books of VA business that they either mispriced or failed to hedge for risk, leaving them open to the adverse effects of low interest rates and high equity volatility, according to Scott Robinson, senior vice president at Moody’s, and Robert Riegel, team managing director, who wrote the report. Much of the fee income came from property/casualty insurance sales, noted Michael D. White, president of the firm. “The property/casualty market has been soft for a long time. Premiums have been declining, and when they do so do the commissions. All insurance agents have had to suffer the soft market, he said. Moody’s also expects asset impairments and losses to stay elevated through the rest of the year, denting profitability and capital adequacy, even though the rally in the first half helped narrow unrealized losses. “We believe that reported investment losses will continue to slowly drag on throughout 2009 and continue in 2010, given the steady pressure on most asset classes and the industry’s practice of delaying losses until impairments are actually apparent,” the report says. Additionally, capital markets have opened, thus allowing insurers to raise money through debt and equity offerings, though some firms still face challenges raising cost-effective capital, Moody’s noted. Only two insurers, Lincoln National Corp. in Radnor, Pa., and The Hartford (Conn.) Financial Services Group Inc., utilized the Department of the Treasury’s Capital Purchase Program as a way to raise capital, accepting $950 million and $3.4 billion, respectively. Moody's indicated that such capital could be considered a way to improve credit quality, but only to the extent that money raised through a debt or equities offering, or via federal aid, would help bolster an insurer's capital or financial flexibility, Evan so, those capital raises aren't likely to lead to a ratings upgrade, the firm said.