Life insurance companies have been some of the winners in the current see-saw market, as financials gain and lose ground in the blink of an eye, and rising interest rates and the signaling of an end to quantitative easing have most investors quaking in their shoes.
While the higher long-term rate environment is buoying stocks like Metlife Inc (NYSE:MET), Hartford Financial Services Group Inc (NYSE:HIG), and Prudential Financial Inc (NYSE:PRU), the industry is facing other problems, such as settlements for incorrectly charging premiums on deceased clients, and an unexpected hit from the variable annuity product line that was once a popular staple of the life insurance sales kit.
Variable annuities come back to haunt insurers
The Wall Street Journal published a story this week spotlighting a report from Moody’s that calls attention to the risks inherent in the variable annuity market. According to the rating agency, variable annuity products were hot in the early 2000s because of promises of tax deferral and income benefits.
While some risks were hedged, insurers failed to account for certain pricing risks — namely, the way variable annuities customers held on to their policies over time, meaning that life insurers like Prudential Financial Inc (NYSE:PRU), Metlife Inc (NYSE:MET) and Hartford Financial Services Group Inc (NYSE:HIG) have faced billions in charges over the past 18 months against the guarantees lingering on their books. Most insurers have, since the financial crisis, put restrictions on these products, or stopped selling them altogether. Still, the unknown risk remains, putting a damper on future profits.
Settlement puts paid to a distasteful episode
In other news, a settlement between 11 life insurance vendors and several U.S. states resulted in more than $760 million being set aside by insurers. The money will be used to repay beneficiaries of deceased clients for funds lost when the insurers not only did not pay out benefits upon death, but continued to draw premiums from the policies of the deceased, often tapping them dry. This was done when insurers were aware of the policyholder’s death, but prior to a request by beneficiaries for a payout.
The companies admitted no wrongdoing, of course, but agreed to amend their practices. The settlement costs probably won’t dent the balance sheets of these insurers — which include those mentioned above, as well as insurance giant American International Group Inc (NYSE:AIG)— but the episode was particularly ghoulish, as insurers were essentially collecting, as one article put it, “premium payments from the dead.”
Reinsurance in the spotlight, again
Additionally, the superintendent of the New York Financial Services department, Benjamin Lawsky, is once again training a beam on life insurers’ use of reinsurance companies, often owned by the companies themselves. Often, these entities are used to stow liabilities from the parent company, making it look healthier than it may truly be.
The report, commissioned last year, identifies at least $48 billion in questionable transactions and calls for tighter regulations on this so-called captive insurance industry.
Though life insurers obviously have their troubles, many are now sitting near 52-week highs, probably based on investors’ knowledge that higher interest rates mean better returns on the insurers’ investments, upon which they rely for income. In juxtaposition to this, other issues appear much less important.
The article Life Gets Complicated for These Insurers originally appeared on Fool.com is written by Amanda Alix.
Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group.
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