Sunday, December 7, 2008
Are Insurers Next?-3
"Insurance companies that have eased the minds of many baby boomers with often-costly variable annuities are beginning to retool these retirement products to offer less-generous benefits, possibly at higher costs. The changes come amid falling markets that can make it harder to insurers to meet the investment guarantees frequently built into these products, which are tax-advantaged mutual-fund-like financial offerings that often promise a minimum return. ... Today, 'you have to expect that you're going to get less for the same money or pay more to get the same benefit,' says John Nadel, an insurance analyst at boutique research firm Sterne, Agee & Leach Inc. ... Milliman Inc., a Chicago consulting firm that advises on hedging programs, calculates an 80% increase in the hedging cost of a commonly sold, lifetime guaranteed-minimum withdrawal benefit for the 12 months through Oct., 31", Leslie Scism and Liam Pleven at the WSJ, 26 November 2008.
"And life insurance policies and annuities? They're guaranteed by state guarantee associations. There's only one hitch: The states have virtually no cash on hand and must rely on promises to pay made by healthy insurers. ... Stocks of life insurers, formerly immune to the fear and panic hitting other sectors, recently became the market's target of choice. Shares have declined nearly 50% in the past two months as investors have learned the extent of losses in insurers' investment portfolios. ... Adding to the pressure, many insurers sold variable annuities with guaranteed-income features, which could cost them an additional $15 billion to support, according to a recent Fitch Ratings report. ... Insurance companies fail in slow motion, if only because policyholders pay expensive penalities to cancel policies", Ben Levisohn at Businessweek, 1 December 2008.
This industry is worth watching. Unless we have a big bull market, it may be in big trouble which I am sure the regulators will do their best to conceal.
Fitch may be optimistic.