Sunday, October 26, 2008
Are Insurers Next?
"Variable annuities, whose sales fueled profits at life-insurance companies in recent years, are starting to drag profits as the stock market declines. ... 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. ... 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 minimum-income guarantees that many annuities carry", Lavonne Kuykendall (LK) at the WSJ, 13 October 2008.
LK does not make it explicit, but I suspect "equity-indexed" annuities are the annuities she is referring to with "minimum-income guarantees". I mentioned these annuities at my 25 August 2008 post. Depending upon how the insurers hedged their portfolios, they could face billions in losses here. As of 31 December 2007, there were supposedly $123 billion in these products outstanding. If the insurers even lose 5% of this, they'll be on the hook for $6 billion