As interest rates sink, insurers feel pressure

NEW YORK Wed Jun 6, 2012 12:16pm EDT

NEW YORK (Reuters) - Life insurers are finding that longer-term interest rates are even lower than they expected and are likely to stay that way for some time, forcing them to shutter some businesses and sell others.

When the Federal Reserve launched "Operation Twist" in September to lower long-term rates, actuaries and analysts said insurers would have to accept weaker investment returns, which along with premiums account for most of insurers' profits.

Since then, 10-year Treasury yields have fallen even lower than most analysts expected, making a bad situation worse. Life insurers are likely to accelerate changes to their business model as a result.

"If we look at the low-interest-rate environment, it's probably going to have transformational aspects to the business," said Doug French, managing principal of Ernst & Young's insurance practice in New York. "You sooner or later have to sit down and rethink the markets you're in, the customers you serve and the products you sell. It can't be business as usual."

Already, some are moving in that direction. MetLife Inc (MET.N), the largest life insurer in the United States, said last month it wants emerging markets to be 20 percent of its operating earnings within five years, up from 14 percent now.

"The environment is not a wonderful environment; we all know that," MetLife CEO Steve Kandarian said in a May 23 presentation.

Others are headed even more directly for the exits. European insurers like ING (ING.AS) and Aviva (AV.L) are looking for a way out of the market, and others have said they may do the same.

PREOCCUPIED WITH RATES

At the annual Standard & Poor's insurance conference in New York on Wednesday, the rate environment was something of a preoccupation.

The hundreds of executives in attendance were polled on which industry sector concerned them most, and two-thirds named the life and annuity business, up from 44 percent last year. More than one in three said the single most important macroeconomic factor for the industry was low rates.

"Unless you owned a company in Japan to see this up close and personal, you'd never have believed we'd be where we are today," said Roger Crandall, chief executive of MassMutual.

Crandall and his fellow panelists at the S&P conference's opening session agreed that insurers had no choice but to make adjustments, the primary question being whether they were simply cutting back on sales of certain products or shutting them down entirely.

"I think most of the industry has adjusted to the current low-rate environment, especially on the annuity side. There are always outliers," said Jay Wintrob, chief executive of American International Group Inc's (AIG.N) SunAmerica unit. "In unusual times like this - and these are unprecedented - we have to look at all the levers in the products."

Those hoping for relief any time soon would also appear to be headed for disappointment. Sterne Agee's chief market strategist, Sharon Lee Stark, on Wednesday forecast 10-year Treasury yields would not even get back to 2 percent this year.

Another snap poll at the S&P conference asked if anyone expected rates to start rising by the end of 2013; some 56 percent said no.

"The worst interest-rate environment for an insurance company is a low-interest-rate environment, and it's not getting any better and it doesn't appear to be getting better anytime soon," E&Y's French said. "Death comes slow."

(Reporting By Ben Berkowitz; editing by John Wallace)

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