Variable Annuities Weigh on Life Insurers
The insurance product is subject to the whims of the equity markets
By Justin Menza From Standard & Poor’s Equity Research
Variable annuities (VAs) esteem been blustering sellers for the life assurance industry in recent years, as rising equity markets and guaranteed benefits increased their popularity. Now that the equity markets are in a freefall, their luster has begun to fade.
When a customer purchases a variable annuity, typically the insurer will endow the cash in a portfolio of mutual-fund like assets. This strategy exposes the variable annuity to market fluctuations, whereby the annuity holder may see a potentially bigger payout at what time markets are rising, on the contrary may see less of a payout when markets are falling.
Additionally, insurers tend to occur a wide range of guaranteed benefits, of that kind as guaranteed minimum subtraction benefits. In this case-ending, a holder can welcome an income for life regardless of the value of the underlying account. Insurers may also sacrifice a guaranteed minimum accumulation do a good turn, whereby the insurer choose guarantee that the account will grow at a certain percentage, typically 5% to 7%, for a period of time. Insurers had been aggressive in offering these riders viewed like they competed in spite of market share, and as swelling right markets made them easier to fund.
Catherine Weatherford, the president and CEO of NAVA, the Association for Insured Retirement Solutions, says “annuities including insurance guarantees provide sundry Americans planning for and manner of life in withdrawal defence in wild monetary times such as these.”
However, the current volatility in the equity markets is making variable annuities and their guaranteed benefits a tougher sell for the life insurers.
“As was the case in the have place of traffic in 2001-2002, costs associated with hedging and increasing reserves notwithstanding the multiform riders on products are becoming to a greater degree of an issue due to the decline in the justice markets,” says S&P Equity Analyst Bret Howlett. “As the equity markets tanked this past September and October, many of the portfolios held by annuity customers have underperformed the guarantees.”
Declining fairness markets may also bruise earnings for those insurers with sizeable VA businesses through accelerated deferred acquisition require to be paid (DAC) amortization. Companies use DAC to defer the sales costs that are associated with acquiring a new customer over the designate of the insurance contract. If a sustained decline in uprightness markets reduces estimated gross profits on annuities, an unlocking of assumptions may occur, causing DAC to amortize faster. Also, such changes in assumptions may lead to increased reserves for products with guaranteed minimum death or living benefits.
Howlett believes we could see the magnitude of losses related to DAC reach the levels that occurred in the 2001 to 2002 bear market. Given that most the breath of life insurers model their assumptions based on 2% increase in equities each mercy, Howlett foresees further unfavorable DAC adjustments weighing forward results as equity emporium losses continue.
Additionally, the guarantees on the variable annuities sold during the bull market of the sometime since 1990s are also starting to come out of the typical penal retribution waiting period of seven to 10 years, which could make things worse in the place of insurers if policyholders start to exercise the guarantees. Howlett notes that the impact is hard to gauge, still.
Hartford Financial Services Group (HIG 7 HHH), the second-largest writer of individual annuities in 2007, is undivided insurer whose annuity matter is suffering from the volatility in the financial markets for the period of the third quarter. The company posted a $522 very great number loss in core earnings in its annuity business during the quarter, compared with a profit of $365 million a year prior. Assets under dealing in its annuity products fell to $103 billion in the period from $133 billion a year earlier.
In addition to the challenges facing the industry in terms of the living benefit riders, sales of these products have dropped from that time most policyholders tend to invest their VA assets in equities. According to data from the NAVA, second-quarter variable annuity sales dropped 11.2% from year earlier levels, while net assets were down 3.3% year-over-year in the limit. For the first six months of the year, total sales were $83.6 billion, a 5.2% sink from the comparable period in 2007. This trend likely continued into the third-quarter as equity markets sold off further, making great number possible customers wary of purchasing the products despite the minimum guarantees offered. Additionally, Howlett notes that manifold insurers are likely to raise prices on these riders, that may further undermine sales.
“Due to indiscreet equity markets, we expect variable annuity sales to decrease significantly in 2008, although products with guaranteed living benefit rides should increase in popularity,” says Howlett. “We believe that assets under cunning practice and fee income will have being adversely insincere by the turbulence in the impartiality markets.”
Looking ahead, S&P believes that annuity sales will continue to be an weighty income source for life and hale condition insurance companies. S&P anticipates that sales will continue to benefit from the popularity of guaranteed living benefit riders, demographic needs, and an increase in external exchange activity (moving from some contract to another). However, assets under management and fee income are likely to decline modestly, reflecting the increased fair play market volatility.
Howlett maintains a impartial outlook steady the life and health insurance activity and does not recommend broad exposure to the group. “The weak equity and credit markets continue to weigh on the life insurers results, and with the fourth quarter off to a rocky start (doubt not spreads remain wide and equity markets are down significantly), we expect earnings for the life arrange to get worse before they get greater good,” says Howlett.
Original text: {news-link}
