Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
More trouble for variable annuities.
Old 10-13-2008, 06:43 AM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
More trouble for variable annuities.

Last week, I wondered if the insurance companies were going to have trouble with paying their VIA and EIA obligations. While nobody is denying claims yet, this WSJ article echos many of my concerns.

Quote:
ariable annuities, whose sales fueled profits at life-insurance companies in recent years, are starting to drag profits as the stock market declines. The damage is coming as insurers also are taking losses on the massive investment portfolios that back their insurance policies. Many losses have come from holdings in the financial sector, including Lehman Brothers securities, and from falling values in some mortgage-backed securities. Insurers also have been hit with billions of dollars in unrealized losses as investment-grade corporate bonds of all stripes have suffered big declines in recent weeks.
Variable annuities are tax-advantaged investment products with mutual-fund-like subaccounts. Now that the stock market has fallen, the insurers face reduced fee revenue as their annuity assets under management shrink. They also, for accounting reasons, face charges against earnings related to the cost of acquiring the business. The Dow Jones Life Insurance Index has dropped 47% in the past four weeks, outstripping the 26% drop in the DJIA over the same period.
In a Friday research note, Morgan Stanley analyst Nigel Dally said he expects "the most challenging quarter for the life insurers in many years."
Friday, retirement specialist Lincoln National Corp. was the latest insurer to report that its retirement business will be a drag on its third-quarter earnings. Lincoln reported a 10% drop from the year-ago quarter in retail deposits into its retirement and insurance products and said it will take a "deferred acquisition cost" charge, referred to as DAC, to reflect how the downturn in the equity markets will affect earnings in its investment-type products.
Other insurers will also likely report increased DAC charges. As the stock market drops, DAC charges increase to reflect expected lower returns on the annuities.
A popular innovation in variable annuities is also increasing the cost to insurers as the equity market drops. Insurers developed hedging programs to manage the risk of market volatility associated with the minimum-income guarantees that many annuities carry. Market volatility has skyrocketed in recent months, which has driven up the cost of hedges and cut insurers' profit margins, said Fred Crawford, Lincoln National's chief financial officer, in a Friday interview. "The current market volatility has eroded some of the returns in these products," he said.
Before I rushed out an bought one of these things I'd triple check the credit rating of the underlying insurance company.

Quote:
On Friday, Standard & Poor's revised its outlook on the life-insurance sector to "negative" from "stable" on higher credit losses, lower fee-based revenues and reduced financial flexibility.
After Hartford's announcement, S&P revised its outlook on Hartford to "negative" from "stable."
__________________

__________________
clifp is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-13-2008, 09:10 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by clifp View Post
Last week, I wondered if the insurance companies were going to have trouble with paying their VIA and EIA obligations. While nobody is denying claims yet, this WSJ article echos many of my concerns.

Before I rushed out an bought one of these things I'd triple check the credit rating of the underlying insurance company.
So, the insurance industry is the only negative outlook? I guess I better load up on automakers and banks......

Just kidding, the exposure to toxic debt for insurers varies widely. For companies like ING and Prudential, it's less than 1/10th of 1 percent of their assets under management. For others, a lot more. So there is a reason for concern, but not panic........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
One more time, variable annuities.... Art G FIRE and Money 217 11-03-2008 09:28 PM
Variable Annuities Are the Way to Go!!!!! 2B FIRE and Money 35 09-21-2007 12:24 PM
Variable Annuities? Worth it? Breitling Young Dreamers 17 04-23-2007 11:28 AM
Variable Annuities Craig FIRE and Money 8 01-13-2005 05:27 PM
Annuities-Variable? Fixed? Immediate jackalope FIRE and Money 6 10-01-2003 05:36 AM

 

 
All times are GMT -6. The time now is 08:23 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.