US Life Chiefs Talk 3Q Low Rates, Systemic Risk, UL Reserves

Historically low interest rates, stock market volatility, uncertainty over the European debt crisis, along with some key unresolved aspects of U.S. financial services reform and reserving for universal life insurance policies with a secondary death benefit guarantee dominated some life insurers' third-quarter earnings conference calls

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Here's what industry executives were talking about:

Low interest rates

Randy Freitag, chief financial officer, Lincoln National: In early September, we provided a forward-looking perspective on how a sustained 2% 10-year Treasury rate would affect both the income statement and the balance sheet. We said earnings would decrease by $50 million in 2012, with an incremental $50 million per year in 2013 and 2014.

Mark Grier, vice chairman, Prudential Financial: Within our U.S. insurance businesses, we have relatively little exposure to products which tend to be the most interest-rate sensitive, such as fixed annuities, universal life and long-term care. To put a fence around our exposure to a continuation of the low interest rate environment in the U.S., I would start with the expected roll-off per year of our general account fixed-income portfolio, including bonds, structured securities and commercial mortgages, and size the amount of investment income decline we would face for each 100 basis points by which the average yield on investments rolling off exceeds reinvestment rates.

Marty Klein, CFO, Genworth Financial: The main impact of low rates is in our life, long-term care and fixed annuity lines. …We have actively managed and hedged this risk for many years, not only through duration of management of our bond portfolio but also through extensive use of hedges. In particular, for our long-term care business, we actively hedge cash flow reinvestment risks, with about 75% of future cash flows on in-force business over the next 10 years receiving yield enhancements if rates stay low.

Dennis Glass, president and chief executive officer, Lincoln National: Although sustained low interest rates would impact the rate of earnings growth for Lincoln over time, we do not expect low rates to materially affect the balance sheet. Importantly, given low rates, we have taken and continue to take decisive action across the organization to protect aggregate margins. For example … we entered into $1.3 billion of Treasury locks with an implied yield of 6.45%, and extended the duration of the life portfolio.

'Systemically Important Financial Institution'

Steven Kandarian, president and CEO, MetLife: The FSOC [Financial Stability Oversight Council] is going to be involved in determining whether you're a non-bank SIFI, but the regulation will be by the Fed going forward if you are designated as such… At this point, no one knows exactly who will be designated non-bank SIFI or if you are designated, what the rules will be. I suspect we won't know who's designated until sometime in 2012. …The hope is that, over time, people in Washington will understand the difference between the banking business model and the insurance industry business model…very different liquidity factors in terms of what kinds of liabilities they have…. We are discussing this issue at length with people in Washington and we are trying to make sure they understand the importance of a level of regulatory feel for our industry so that they don't simply pluck out a few companies and say you're a non-bank SIFI and everyone else is not.

Grier: With respect to the potential to be [a SIFI], there are couple of different issues there. One is the broad question of oversight, as it would relate to, particularly, the holding company and the unregulated subs, which is a hot topic in light of the experience with AIG and the financial crisis…. We are not currently in the same category as a bank holding company. In that respect, we don't have the same kinds of issues that some other companies have.

Actuarial Guideline 38

John Johns, chairman, president and CEO, Protective Life: You may have seen an article…dealing with AG 38, the actuarial guideline dealing with the reserving of universal life products…. Our regulators have found that we are compliant with AG 38 and that our reserves are adequate…. We are involved in the industry discussions that are ongoing now with the regulatory community, with the NAIC.

Glass: Our reserves are more than adequate and … we comply with this particular regulation…. Our main regulator, the state of Indiana, came out with a statement this morning that essentially confirms what I've just said. With respect to where we are in this process at the NAIC, this is not the first time we've gone through this process on AG 38. We went through it in 2005, and I believe we'll have the same result and that is that we'll come up with a solution that is satisfactory to all the parties.

Rich Bielen, CFO, Protective Life: We think we're well reserved with a fair amount of redundancy around our [secondary guarantee UL] product.

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)