From April 2009 Resource

Success Strategies

By Jennifer C. Rankin and Ron Clark

The insurance industry has been hit hard by the worst economic recession in decades, but there’s  some good news to share. Although some insurers have been hammered, quite a few are doing well.  And among the insurers who have had disappointing results, there are some who have areas of strength amid the weakness. Resource gathered data on a wide range of insurers, both stock and mutual, and found many examples of successful strategies.

   First, some background. According to ratings agency A.M. Best, 2008 was among the worst in memory for life insurers’ operating performance—the the key drivers being substantial realized and unrealized losses on investment portfolios, higher costs of capital and a declining revenue base (see Rating Agency Perspective at end.

   What happened at the product level? In a word, lots. LIMRA has released its 4Q2008 and full-year 2008 sales survey numbers and, for the most part, they are disappointing, although several products are doing well, notably fixed annuities and whole life (see Product Sales Mixed, at end).

   Complementing these product successes is a positive long-term outlook for the life and annuity industry. Although they continue to lower the ICR and FSR ratings of individual companies and the short-term outlook for the industry, the ratings agencies believe the industry has strong credit fundamentals, good capitalization, solid businesses, strong (albeit lower than historical) earnings, and strong liquidity. They also believe the industry remains well positioned to capture the opportunities in the retirement market.  

Who’s Succeeding?

So, who’s succeeding in this exceedingly difficult business climate?

   For starters,  New York Life. A Fortune 100 company founded in 1845, New York Life is the largest mutual life insurance company in the U.S. and one of the largest life insurers in the world. Its family of companies offers life insurance, retirement income, investments and long-term care insurance. New York Life Investment Management LLC provides institutional asset management and retirement plan services. Other New York Life affiliates provide an array of securities products and services, as well as institutional and retail mutual funds.

   At year-end 2007, New York Life had US$ 280 billion in assets and more than US$ 12 billion in operating revenues. The company also surpassed US$ 3 billion in insurance sales for the first time, a compound annual sales growth rate of 15.1 percent over the previous four years.

   In 2008, New York Life reached another milestone: total sales of its income annuities exceeded US$ 1 billion for the first time, reaching more than $1.2 billion. The sales benchmark includes sales through New York Life’s career agency system of US$ 850 million and income annuity sales through its partnered banks of US$ 350 million. Further, sales through the company’s AARP Lifetime Income Program, which offers lifetime income annuities to AARP members, exceeded US$ 100 million in 2008—a new milestone for sales of this product through AARP.

   On the accumulation side, investment annuities exceeded US$ 9 billion for the first time, driven by strong sales of deferred annuities. In the bank channel alone, the company’s sales of fixed annuities through partnered banks more than doubled to US$ 4.6 billion for 2008, from $2 billion in 2007.

   “Over the past decade, attaining a secure retirement has been made daunting by the demise of traditional defined benefit pensions and questions surrounding Social Security,” says Chris Blunt, senior vice president of New York Life’s new Retirement Income Security (RIS) business, which encompasses income and investment annuities, long-term care insurance and the distribution of mutual funds. “The current financial crisis has further illuminated the need for a secure retirement as millions of Americans have seen the alarming erosion of their retirement assets. New York Life has led the way in adding consumer-friendly features and benefits to our annuity products, and the enormous sales growth we’ve seen in our annuity business is an affirmation of the value consumers see in those innovations, which overcame many traditional concerns about annuities.”

   In 2003, sales of income annuities, which are also known as fixed immediate annuities, totaled US$ 116 million at New York Life.

   Sales began to soar in 2004 following the addition of innovative features, including a Changing Needs option, which allows policyholders to arrange for their payments to increase up to five times the original amount, or decrease by one half, should their retirement needs change; a Payment Acceleration option, which allows policyholders to accelerate some payments to meet short-term liquidity needs;  a Cash Withdrawal option, which allows policyholders to access a portion of their remaining lifetime payments when they need cash; an Annual Increase option, which allows policyholders to automatically increase the payment amount to help guard against inflation; and a Legacy option, which pays a percentage-of-premiums death benefit no matter how long the policyholder has been receiving income payments.

   New York Life also ranks among the top six sellers of long-term care insurance, and is a leading provider of investment annuities. Its MainStay mutual funds rank among the largest fund complexes in the United States.

   New York Life also benefits from the competitive advantages of its core career agency force. Its agents have led the industry in Million Dollar Round Table (MDRT) membership for 53 consecutive years. The agency channel has contributed to the company’s strong persistency and prominent market presence within the individual life market, while delivering strong sales growth.

   Another success factor for New York Life is its sizeable inforce block of traditional life insurance, which produces stable, long-term cash flows and is the foundation of the company’s operating performance. The company’s product portfolio also is absent of products containing aggressive secondary guarantees. The conservative nature of New York Life’s product portfolio, together with its large block of ordinary life business, translates into one of the most creditworthy liability profiles in the industry.

   In a recent Retirement Income Reporter interview, Blunt discussed recent changes at New York Life as well as a number of moves New York Life is considering to build upon its continued success in turbulent times.

   After New York Life President and CEO Ted Mathas was tapped for the job in June 2007, he held a series of strategy meetings called New York Life 2020 to map out the company’s goals, opportunities, strategies and markets. The meetings identified four big opportunities: life insurance in the U.S., asset management, international ventures and retirement income. Mathas then decided to place an executive in charge of each business, creating a new corporate structure.

   For the first time, the firm would separate annuities from life insurance and pair it with mutual funds within a new organization, the aforementioned RIS group. According to Blunt, the reorganization represented a break with the way most insurers have approached retirement income. Most companies either put someone in charge of the overall retirement business or decide that because they sell variable annuities, retirement income will be solely about variable annuities with living benefits. RIS differs in that it avoids pushing a single retirement solution to its clients. “Instead of being product-centric where every boutique is a fully-integrated business,” says Blunt, “we’re pulling every product that is a potential solution or part of the solution together into one organizational structure.”

   At a time when many of its publicly traded peers are contracting or faltering beneath the weight of the global economic crisis, New York Life is considering a number of growth opportunities: a possible foray into variable annuities with living benefits (properly priced to reflect risk); an expansion into the defined contribution market; and the potential for mutual fund acquisitions.

   Distribution—the pipeline so to speak—is of paramount importance to New York Life’s plans for the future. It is already the leading provider of immediate annuities through banks and is adding close to three dozen bank channel wholesalers. The company also hopes to increase its captive agent force to 10,000 by 2015, from 8,200 agents today. It also is eyeing an expansion in the independent financial planner channel.

   In an economic climate that has weakened competitors and created upheaval in agent/advisor/bank relationships with other insurance product manufacturers, New York Life says it has the necessary capital to pursue all of these opportunities—and then some.

   One of New York Life’s greatest competitive strengths, of course, is its mutual form of ownership. Mutual companies are owned by their policyholders and are not publicly traded. Many of its peers demutualized—that is, became publicly-traded companies—in the 1990s, among them Prudential, MetLife, John Hancock, Mutual of New York, Principal Financial and Phoenix Mutual. New York Life did not, choosing, instead, to fully embrace its mutuality.

   Mathas sees no reason to change that stance. In a video message on the company’s Web site, he says, “We were built for times like these. As a mutual insurance company, we serve only one audience: our policyholders. Publicly traded life insurance companies face a constant trade-off between policyholders and shareholders. In contrast, every dollar of value we create goes to benefit our policyholders, now and in the future. Perhaps the most important benefit of mutuality is that it allows us to keep a long-term perspective in all our decision-making. This is crucial when we are making promises we will be keeping 20, 30, or 40 years into the future. And our independence from the demands of outside investors and Wall Street analysts means that we have the freedom to walk away from investments or sales practices that offer potentially strong near-term returns but may not be in our policyholders’ long term best interests. Because of our mutuality, New York Life has a long history of taking contrarian stands that have proved to be very sound decisions.  When times are good, publicly traded and mutual life insurers generally both perform well. But when times are bad, the benefits of mutuality shine clearly.”

   The ratings agencies agree. Last month, A.M. Best affirmed New York Life’s financial strength rating of A++ (Superior), citing its leading position in the U.S. life insurance market, highly productive career agency force, superior risk-adjusted capitalization, very favorable liability profile, solid operating earnings and commitment to mutuality. Fitch rates the company AAA (Exceptionally Strong); Moody’s Aaa (Exceptional); and Standard & Poor’s  AAA (Exceptionally Strong). It doesn’t get much better than that, especially when these agencies give the overall industry a negative rating for the foreseeable future.  

Mutual Advantage

New York Life wasn’t the only insurer to eschew demutualization. The boards of directors of other mutual companies—among them Northwestern Mutual, Massachusetts Mutual, Pacific Life, Penn Mutual, Guardian Life, Minnesota Life, Ohio National Life, National Life of Vermont, Union Central Life, Acacia Life and Ameritas Life—decided to either remain mutual or to form mutual insurance holding companies. Nevertheless, at the end of 2006 there were fewer than 80 mutual life insurers in the United States.

   Their numbers may be shrinking, but their results are not.

   When Northwestern Mutual released its numbers for 2008, it also announced more than US$ 4.5 billion in dividend payments. Other highlights for 2008 include maintenance of a strong financial position despite unprecedented market turmoil, continued revenue growth, excellent operating fundamentals across all product lines and another record year for recruiting of new financial representatives.

   “Northwestern Mutual entered 2008 with a near-record level of surplus, which enabled us to withstand the tough economic and investment climate that all companies faced,” says Edward J. Zore, president and CEO. “While not immune to the adverse economic environment, we were well-prepared and are in a good position for the future.

   “As the difficult market conditions continue, our strong capital base and distinctive business model position us to weather the volatility. Nearly three-quarters of our total insurance premium revenue is generated by the company’s large block of whole life insurance, considered the most stable and lowest risk type of product in the industry. We do not make aggressive guarantees, either with universal life insurance or variable annuities. We have no debt on our balance sheet, and our dividend payout reflects our continuing commitment to financial security and long-term value for policyowners. By every measure, Northwestern Mutual remains very sound financially.”

   Among the highlights from Northwestern Mutual’s 2008 financial results:  

* Participating policyowner dividends. The US$ 4.5 billion dividend payments include a dividend interest rate of 6.5 percent on most unborrowed permanent life insurance funds; more than US$ 200 million in total dividends on individual disability policies, a 29 percent increase over 2007; and an estimated US$ 9 million in dividends to long-term care policyowners.

*  Capital position. Surplus and asset value reserve (total surplus) reached US$ 13.4 billion.

*   Diversified portfolio. During unprecedented market turmoil, the company’s portfolio remained diversified and concentrated in high-quality, fixed-income investments. Its US$ 79.3 billion bond portfolio has limited exposure to any single industry or issuer and 89 percent of the holdings are rated as investment-grade at year-end 2008. The company’s US$ 21.7 billion commercial mortgage loan portfolio, underwritten by the company’s real estate field offices, is diversified geographically and by property type, is well-collateralized, and had no delinquencies or defaults in 2008. Policy loans are fully secured by policy cash values. The company has maintained strong liquidity, with holdings of more than $25 billion in cash equivalents, U.S. Treasuries, or government-guaranteed debt. In addition, the company has issued no debt or funding agreements. * Total insurance premium revenue. Total premium revenue, including new and renewal premiums, increased two percent to US$ 13.6 billion in 2008, with each insurance product line contributing to the overall premium growth. Especially noteworthy was the six percent increase in premium sales of the company’s flagship traditional whole life insurance product. The company’s persistency rate for life insurance protection in-force remained over 96 percent during 2008. In addition, mortality, morbidity and expense fundamentals for the insurance businesses were all excellent.

* Net investment income. Net investment income increased four percent to US$ 7.8 billion, while total general account investments increased three percent to US$ 135.1 billion after mark-to-market adjustments to the reported value of public and common stocks. Separate account assets, which represent the mutual fund investments made by variable life and variable annuity policyowners, are also marked to market and decreased 32 percent during 2008 to US$ 13.4 billion. The company finished 2008 with total assets of more than $155 billion.

   That’s not all. Northwestern Mutual recruited 2,089 new full-time financial representatives last year, a 15 percent increase over 2007. Its sales internship program has been on Vault, Inc.’s Top Ten list for best internships for 13 years running and Northwestern Mutual again ranked in Selling Power magazine’s annual “America’s 50 Best Companies to Sell For” survey, the results of which were published in the magazine’s November/December 2008 issue.  And for 25 years, Northwestern Mutual has been “America’s Most Admired” life insurance company in FORTUNE® magazine’s annual survey.

Hybrid Concept

Like New York Life and Northwestern Mutual, Ohio National, which reorganized under a mutual holding company (MHC) structure in late 1998, has reported solid results for 2008.

   The mutual holding company structure is a hybrid concept—that is, part mutual company and part stock company. The stock company may be publicly traded or held as a wholly-owned subsidiary until such time that the organization should choose to go public. Ohio National believes this structure provides important strategic flexibility and gives it timely and efficient access to the capital markets.

   Ohio National Financial Services just announced records in earnings, sales and capital growth, including an unequalled industry record in individual life insurance sales performance.

   “Ohio National had an outstanding year in 2008, despite one of the most volatile economic climates anyone can remember,” says David B. O’Maley, chairman, president and CEO. “We have been able to consistently grow our enterprise capital strength in the face of unprecedented market conditions while providing high-value, low-cost products to our customers. Given the extremely difficult economic environment that financial services companies face, our results are exceptional.

   “At the core of our belief system and focus is delivering policyholder value, which derives from our mutual company heritage. Our management view and operational execution are long term because our commitments to policyholders are long term. We maintain a rigorous, conservative risk management discipline. Most importantly, our focus has been consistent through the years.”

   Among the financial highlights for 2008 was GAAP equity (excluding FAS 115) of US$ 1.53 billion, an 8.7 percent increase. Pre-tax operating earnings climbed to US$ 386.1 million, a 125.4 percent increase.

   Net income (after tax) climbed to US$ 146.3 million, a 26.4 percent increase.

   On the sales front, Ohio National has grown its individual life insurance sales for the 19th consecutive year. This growth is organic—that is, not achieved through acquisition. In 2008, individual life insurance new annual premium was a record US$ 93.5 million, up from US$ 92.7 million in 2007.

   The company also has earned very strong financial security ratings from Standard & Poor’s (AA), A.M. Best (A+) and Moody’s (A1) and a stable rating outlook.

   Finally, dividends paid to participating policyholders were US$ 38.6 million, a 9.4 percent increase. For the 85th consecutive year, Ohio National paid dividends on all participating whole life policies.

   Another MHC, Securian Financial Group, rewarded its employees for stellar 2008 results by contributing 5.5 percent of their annual salaries to their 401(k) retirement accounts.

   For 35 years, Securian’s profit-sharing program has contributed to each employee’s 401(k) account, regardless of whether the employee contributes at all. The amount has ranged from a low of four percent to a high of 10 percent of salary. Securian’s profit-sharing record continued unbroken this year despite the financial meltdowns that are occurring throughout the financial services industry.

    “These are the worst economic conditions in my career, and in some people’s estimation, the worst since the Great Depression,” says Chairman and CEO Robert L. Senkler, who joined Securian out of college in 1974. “But, despite this environment and the well-documented problems of other companies, we survived and indeed thrived. The high quality and diversification of our assets is helping us weather this period better than most of our peers, and our relative position remains very good.”

    Senkler says all of the company’s insurance businesses set sales records in 2008, and they all made money. Top line growth, measured in GAAP product revenue, increased 20 percent, and insurance in force increased 15 percent.

    Earnings were solid but less than expected as a result of declining investment yields. Reported GAAP operating earnings were $100 million. Capital, measured as realized GAAP equity, declined seven percent to $2.5 billion as required investment write-downs offset operating earnings. Assets under management declined 19 percent to $24.6 billion due to the adverse investment markets.

    The quality of Securian’s investments remained well above industry norms. At year-end, 97 percent of the bonds in its life insurance general account were investment grade, and there were zero mortgage delinquencies.

    “Although some losses are inevitable in this environment, we ended 2008 with the highest capital and surplus-to-liability ratio of any company in our highly rated peer group and we are one of the most highly rated life insurance companies in America for claims-paying ability,” says Senkler. “We have sufficient capital to protect our company and keep the promises we’ve made to our customers.”

    In 2008, Securian retained 96 percent of its employees and repeated its annual appearances on the Minneapolis-St. Paul Business Journal’s list of “Best Places to Work in the Twin Cities,” the AARP’s list of “Best Employers for Workers over 50,” and Computerworld’s list of the “100 Best Places to Work in IT.”

   Securian is one of the most highly-rated insurance groups in the nation, with only 16 other companies receiving financial strength ratings as high or higher. A.M. Best’s FSR rating is A+ (Superior), while Standard & Poor’s rates Securian AA- (Very Strong); Moody’s, Aa2 (Excellent); and Fitch, AA (Very Strong).

   Securian Financial Group, Inc. provides financial security for individuals and businesses in the form of insurance, retirement plans and investments. Affiliates include Minnesota Life Insurance Co., Advantus Capital Management, Allied Solutions, LLC, Securian Financial Services, Inc., and Securian Trust Company. As of December 31, 2008, Securian has $731 billion of life insurance in force, $25 billion in assets under management and a nationwide work force of 3,500 employees. Securian serves more than 9,000,000 customers in the U.S.

   Securian adopted the mutual holding company governance structure in 1998. The parent entity is Minnesota Mutual Companies, Inc.

Taking  Stock

How did stock companies fare in 2008? Even when their share prices took a beating on Wall Street, many announced solid results.

   MetLife, for instance, reports that total premiums, fees and other revenues increased 11 percent over 2007, reaching US$ 32.9 billion. Premiums, fees and other revenues were up 19 percent for Institutional Business and 11 percent for International. In addition, U.S. annuity deposits were up 16 percent over 2007. And the company maintained its annual common stock dividend at 74 cents per share.

    In addition, fourth quarter 2008 net income was US$ 1 billion (compared with US$ 1.1 billion in 2007);

   “In 2008, MetLife generated a strong, 11 percent increase in top line results in what is clearly the most challenging economic environment we have experienced in decades,” says C. Robert Henrikson, chairman, president and CEO. “During the year, we benefited from a flight to quality in the marketplace. Our core businesses continued to grow and we achieved a number of positive results, including higher pension close-out sales as well as strong annuity deposits in both the U.S. and Japan.

    “MetLife’s capital strength, strong ratings and focus on the long-term will continue to set us apart as we move ahead in 2009. These attributes, along with our diversified businesses and investment portfolio, serve us well.”  More specifically:  

*     Institutional Business. Institutional Business continued to generate significant top line growth across all of its businesses. Fourth quarter 2008 total premiums, fees and other revenues were 18 percent higher than the fourth quarter of 2007, reaching US$ 4.2 billion. Operating earnings were US$ 272 million, down from US$ 527 million in the prior period, primarily due to significantly lower investment income. Premiums, fees and other revenues in the group life business increased nine percent for the quarter due largely to growth in term life premiums. Group life operating earnings were US$ 117 million, up 26 percent from $93 million as the business continued to experience solid underwriting and investment results, as well as lower expenses. Retirement & Savings premiums, fees and other revenues grew 80 percent over the fourth quarter of 2007 to reach US$ 689 million, primarily due to several pension closeout sales in the U.K. as well as higher structured settlement sales. Retirement & Savings operating earnings were US$ 84 million, down from US$ 336 million, driven mainly by lower investment income.

*     Individual Business. Total Individual Business premiums and deposits grew 58 percent over the prior period as a result of strong growth in fixed annuity deposits. For the quarter, Individual Business had an operating loss of US$ 106 million, compared with operating earnings of US$ 380 million in the prior period. The decline in earnings was primarily due to the increased amortization of deferred acquisition costs and other capitalized items, along with lower fee revenue, resulting from the poor equity market performance in the 2008 quarter. In the annuity business, total deposits grew 91 percent over the prior period to reach US$ 7.5 billion as fixed annuity deposits grew from US$ 261 million to US$ 4.1 billion. In addition, variable annuity deposits remained strong at US$ 3.4 billion, down from US$ 3.7 billion in the fourth quarter of 2007. For both fixed and variable annuities, net flows were positive and lapse rates declined. In the life business, total first year premiums and deposits were US$ 228 million, compared with US$ 307 million. Total life operating earnings were US$ 88 million, down from US$ 181 million due mostly to a decline in investment income.

*     International Business. In the fourth quarter of 2008, total International premiums, fees and other revenues were US$ 1 billion, compared with US$ 1.1 billion in the prior period. The year-over-year performance reflects the negative impact of foreign currency exchange rates in the fourth quarter of 2008. Total operating earnings were US$ 94 million, compared with US$ 193 million in the prior period. The fourth quarter of 2008 includes a one time liability adjustment in the Latin America region. In the fourth quarter of 2007, International’s earnings were positively impacted by a one time liability reduction and related tax benefits (due to pension regulation changes in the Latin America region) of US$ 105 million (14 cents per share).

   MetLife has a high quality, diversified US$ 322.5 billion general account portfolio. For the quarter, net realized investment gains, net of income tax, were US$ 1.3 billion, including US$ 403 million, net, in credit-related losses and impairments. These credit-related losses are offset by derivative gains of US$ 1.6 billion, net of income tax, which arose primarily from a decrease in interest rates in the fourth quarter. Derivative gains also include other items which primarily offset in the quarter driven by changes in currency, equity and credit spreads.

Solid Results

Jackson National Life also produced solid results in 2008. For starters, the company generated more than US$ 14 billion in total sales and deposits during 2008—the second-best sales year in the company’s history. The resilient sales performance was driven primarily by higher sales of traditional fixed annuities (up 179 percent year over year) and institutional products (up 18 percent year over year), offset by lower sales of variable annuities (down 29 percent year over year).

   “Recently, there has been a flight to quality in the U.S. life insurance market,” says Clark Manning, Jackson’s president and CEO. “With a broad product portfolio that includes variable, traditional fixed and fixed index annuities, as well as life insurance, mutual funds and institutional products, Jackson is able to meet the needs of advisers and their clients under all economic conditions.”

   Jackson, an indirect wholly owned subsidiary of the U.K.’s Prudential plc, had nearly US$ 4 billion of regulatory adjusted capital as of December 31, 2008, which represents nearly nine times the regulatory requirements. Furthermore, Jackson’s statutory capital ratio (calculated as total adjusted capital divided by statutory reserves, excluding separate accounts) was nearly nine percent at December 31, 2008.

   In 2008, Jackson recorded more than US$ 11.8 billion in retail sales and deposits, down seven percent from the prior year period, with total annuity net flows (total premium minus surrenders, exchanges and annuitizations) falling two percent year over year. Variable annuity sales totaled US$ 6.5 billion, compared to US$ 9.1 billion in 2007. Sales of traditional fixed annuities were US$ 3.2 billion during 2008, compared to US$ 1.1 billion during the prior year. Jackson sold US$ 928 million in fixed index annuities, up from US$ 894 million during 2007. In the fourth quarter of 2008, fixed index annuity sales were 35 percent higher than third quarter 2008 and 45 percent higher than fourth quarter 2007.

   “Jackson is an attractive business partner for advisers because we consistently offer innovative solutions, value-added wholesaling support and award-winning customer service,” says Clifford Jack, executive vice president and chief distribution officer for Jackson. “During 2008, Jackson further strengthened its distribution relationships by providing the resources, guidance and services advisers need most during difficult times.”

   Jackson generated life insurance sales of US$ 58 million in 2008, up 13 percent over 2007 due primarily to a 32-percent year-over-year increase in universal life sales. Deposits in the Jackson FundsSM, which were launched in January 2007, totaled US$ 67 million in 2008, compared to US$ 120 million in 2007. During 2008, Jackson sold more than US$ 2.2 billion in institutional products, up from US$ 1.9 billion in 2007. Jackson participates in the institutional market on an opportunistic basis.

   Curian Capital, Jackson’s separately managed accounts subsidiary, accumulated US$ 1.1 billion in deposits during 2008, compared to US$ 1.3 billion in the prior year. As of December 31, 2008, Curian’s assets under management totaled US$ 2.6 billion, compared to $3.5 billion at the end of 2007, due primarily to a sharp decline in equity markets.

   Jackson’s financial strength ratings have remained unchanged for more than five years. As of December 31, 2008, Jackson was rated A+ (Superior) by A.M. Best, AA (Very Strong) by Standard & Poor’s, AA (Very Strong) by Fitch Ratings, and A1 (Good) by Moody’s. In August 2008, Standard & Poor’s affirmed Jackson’s AA rating with a stable outlook and, in October 2008, Moody’s affirmed Jackson’s A1 rating with a stable outlook.

   “Jackson is a well-capitalized company with a diversified suite of retirement savings and income products and a highly effective distribution network,” says Manning. “By operating in a Long-Term SmartSM fashion, we have positioned ourselves for stability and consistent growth over the course of the business cycle.”

   With more than US$ 82 billion in assets (GAAP), Jackson National Life is an industry leader in variable, fixed and fixed index annuities. The company also offers life insurance and institutional products. Jackson markets its products in 49 states and the District of Columbia through independent and regional broker-dealers, financial institutions and independent insurance agents. Jackson’s subsidiary, Jackson National Life Insurance Company of New York®, similarly markets products in the state of New York. Through its affiliates and subsidiaries, Jackson also provides asset management, retail mutual funds and retail brokerage services.

   Principal Financial  also has some good news to share.

   “Given the difficult business environment, The Principal delivered very solid operating results for the fourth quarter and the year, demonstrating the value of revenue and earnings diversification and strong business fundamentals,” says Larry Zimpleman, president and CEO. “In addition, we continued to focus on effectively managing risks in a challenging market by building on our liquidity position and focusing capital on our longer-term growth opportunities.”  2008 highlights include:

*     Life and Health earnings improved US$ 49.3 million (22 percent) in 2008 to US$ 270.4 million, driving a 250 basis point improvement in segment return on equity.

*     Principal International earnings improved US$ 15.6 million (14 percent) in 2008, to a record US$ 126.3 million.

*    Despite a 21 percent drop in assets under management in 2008 due to market conditions, 2008 operating revenues declined only four percent compared to 2007, on the strength of record revenues for the Global Asset Management and International Asset Management and Accumulation segments.

*     Maintained outstanding sales of the company’s three key retirement and investment products despite a difficult sales environment, with US$ 21.1 billion of sales on a combined basis in 2008, compared to a record US$ 21.7 billion for 2007. This includes fourth quarter 2008 sales of US$ 2.1 billion for Full Service Accumulation, US$ 1.8 billion for Principal Funds and US$ 0.7 billion for Individual Annuities.

      “While uncertainty remains around the length and severity of the global recession,” says Zimpleman, “we enter 2009 with a strong and proven business model. Deposits into our three asset management and accumulation segments were a record US$ 112 billion in 2008. Principal Global Investors’ relative investment performance remains strong, and we continue to attract third party assets. And Full Service Accumulation began 2009 with its largest retirement plan win on record, providing defined contribution and nonqualified plan services to Community Health Systems, the largest publicly traded hospital company in the U.S. With some 80,000 participants and US$ 1.4 billion in assets, this win is further evidence of the competitive advantage we have with Total Retirement SuiteSM.

   “In 2009, we’ll continue working to address the challenges the market presents. We believe The Principal will emerge even stronger.”

   The difficult economic environment in 2008 led to losses at another insurance company, Protective, but there was some good news on sales. The company  reported a loss, on a net income basis, for the quarter and the year. The losses were generally attributable to realized losses and impairments in its investment portfolio and charges incurred as a result of mark-to-market and fair value accounting principles. On an operating basis, Protective reported positive earnings for the quarter and the year. Adjusted for mark-to-market accounting items, its operating earnings for the year were only slightly below its original expectations for the year.

   “At the segment level,” says John D. Johns, chairman, president and CEO, we reported strong results in Life Marketing, Acquisitions and Stable Value. We enjoyed a record level of annuity sales and positive fund flows in every annuity product line.

   “In recent years, we have made significant progress in building our teams, improving our product portfolios, expanding our distribution relationships, enhancing service levels and managing expenses. Those fundamentals are the foundation upon which we plan to build when economic conditions return to more normal levels. I remain confident in the ability of our team to work through and adapt to the challenges we face and continue to support the needs of our distributors and customers in a quality manner.”

   As you can see, life insurers continue to sell products that consumers want, with more than a few reporting excellent sales in one of the worst economic downturns in industry history. This year is going to be just as challenging,  if not more challenging. Resource will keep you posted. 

   EDITOR’S NOTE: If your company  has a success story you would like to share, contact the editorial staff at Resource.  

   Clarification: In the cover story “Uncharted Waters” (February 2009), Resource states: “Fund companies ranging from American Century to Van Kampen are participating in the [Temporary Guarantee Program for Money Market Mutual Funds], as are insurers, among them Prudential Financial, TIAA-CREF, Hartford Financial Services, AIG SunAmerica, Symetra Life and others.” It is Symetra Life’s mutual fund partners that participate in the Treasury program, not Symetra Life itself.    

* * * * * * * * * *

In September 2008, A.M. Best revised the outlook on the U.S. life/annuity segment to negative from stable, citing uncertainty in terms of the future direction of the economy, real estate values, interest rates, equity markets—both domestic and global—and liquidity. Specific areas of emerging investment risk cited included a number of previously stable investment classes—including commercial mortgages, asset-backed securities, and alternative investments—as well as prime residential mortgage-backed securities. Moreover, the continued weakness in the equity markets translated to reduced fees for asset-based products, raising the potential for DAC write-offs and increased hedging costs for writers of variable annuities and fixed-index products. The severe decline and volatility in the equity markets has caused capital strain for many life companies, especially the large variable annuity writers.

Since that time, macroeconomic conditions have continued to deteriorate and many of these predictions have come to fruition. Despite the extraordinary steps taken by governments globally to combat this unprecedented economic downturn, uncertainty continues about the depth and duration of the lingering financial crisis. Recently, U.S. equity markets have again re-touched November 2008 bear market lows. Clearly, these negative macroeconomic factors are having an adverse impact on life insurers’ balance sheet strength and operating performance.

Over the last six months, A.M. Best has taken a number of negative rating actions in the life insurance sector, triggered primarily by investment concerns. A.M. Best expects to take more negative rating actions—including downgrades of issuer credit ratings (ICR) and financial strength ratings (FSR)—as well as outlook revisions as it finishes reviewing the year-end results for life and annuity companies.

Why? A.M. Best cites a number of disconcerting trends, including:

* Escalating credit impairments and write-downs in investment portfolios

* High concentration of real-estate linked assets

* Significant levels of unrealized losses relative to capital

* Reduced levels of tangible equity and lower financial flexibility

* Write-offs of goodwill and DAC

*  Weakened fixed charge coverage and higher financial leverage ratios

* Deterioration in earnings in core business lines

*  High exposure to equity market volatility, translating into increases in variable annuity reserves and capital combined with declining fee income and assets under management

*Lower sales in certain product lines

* Higher levels of complexity in product design, capital structures
and accounting treatment, which at times can mask true economic risks

* Pressure from non-insurance subsidiaries on the enterprise’s
earnings and capital

 

The other ratings agencies are just as concerned. In February, Fitch said it may downgrade more than half of insurers worldwide this year. Standard & Poors’ lowered its ICR and FSR ratings of 10 groups of life insurers and its ICR rating on seven life insurance holding companies. Moody’s put its ICR rating on four major life insurers on watch for a possible downgrade.

In the fourth quarter of 2008, new annualized premium for individual life insurance dropped 14 percent, ending the year with an overall seven percent decline, according to LIMRA. The fourth quarter marked the single sharpest decline in premium since the fourth quarter of 1951. The overall decline for the year erased the strong seven percent gain of the previous year and was the largest one-year decline in LIMRA’s records. The last significant annual decline was in 1991, coming off a mild recession, when premium fell five percent.

Universal life sales fell 23 percent in the fourth quarter. Variable universal life products continued to follow market trends, dropping 18 percent in the fourth quarter, finishing the year down 17 percent. Nearly 90 percent of the writers suffered declines, most in double digits. Term life premium was down three percent for the quarter and two percent overall in 2008. Nearly 60 percent of term writers saw declines in 2008, with 30 percent experiencing double-digit declines.

The number of individual life policies sold was down 10 percent in the fourth quarter, and finished the year down four percent.

Sales of variable annuities declined 30 percent in the fourth quarter as compared to the fourth quarter of 2007. It’s important to note that 2007 was a record year for VA sales. While 2008 year-end sales for VAs were down 15 percent, VA sales have rebounded from larger deficits. In 2001, VA sales dropped 19 percent yet saw double-digit growth within two years. In 2008, total VA sales reached US$ 155.6 billion.

Two very bright spots on the product front are fixed annuities and whole life.

Fixed annuity sales soared 79 percent in the fourth quarter to end 2008 at a record-setting single year figure of US$ 109.4 billion. Sales increased for all fixed deferred annuity product types in 2008, led by a 135 percent increase in market value adjusted products. Sales of book value products, the largest fixed annuity product type, grew 84 percent. Indexed annuity sales increased six percent. Immediate fixed annuity sales, while small in total, increased 23 percent in 2008, fueled by growing numbers of retirees seeking guaranteed lifetime income.

In addition, following a third quarter resurgence of seven percent, whole life sales increased two percent in the fourth quarter, ending two percent higher for the year.

Contact Resource at resource@loma.org