Life insurance companies always seemed to thrive, irrespective of the market conditions. However, things do not seem to be the same anymore. The consistent increase in profits and dividends that were seen each quarter every year is now fast becoming a thing of the past. Investors who were more than eager to invest in these companies are now thinking twice about the same.
The global financial crisis that hampered the growth of many industries around the world has also had a significant impact on the life insurance sector as well. Just like the other industries, it is going to take a considerable amount of time for the insurance industry to stabilize as well.
Manulife Financial Corporation which is counted among the largest life insurance companies in North America has dramatically decreased in size. The market value of the company has taken a big deep and is being traded at the value that was being traded at during the recession in March 2009.
Sun Life Financial Incorporation that seemed to be doing well, unperturbed by the poor market conditions, has now shown that it is as volatile as the other companies. With consistent warning from various rating agencies and decreasing profits, this company is facing the brunt of economically tough times.
Financial Services Inc. and Industrial Allied Insurance are also facing challenging times despite being cautious in their approach. Though there are many reasons for the downfall of life insurance companies, there are a few factors that seem to take precedence.
The first factor is the rate of interest. The money that comes from policy premiums are invested by insurance companies in fixed income investment options such as high ranking government bonds. The income that is generated by these bonds is used by the life insurance companies to pay off the policy liabilities to the policy holders. The insurance companies rake in profits when the interest offered on these government bonds is high; however, when the interest earned is less, the noose tightens around the insurance companies making it tough for them to pay off policy liabilities.
The volatility of the equity market is another reason for the setback for life insurance companies. Insurance firms have been heavily investing in equity markets to benefit from the fastest growing segment of finance. However, the volatile market situation has proven to be a dampener to their plans, which has led to the downfall of companies that had invested heavily in these markets.
