More trouble for variable annuities.

[clifp]

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.

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.

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."

 

[FinanceDude]

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........