NU Online News Service, Jan. 28, 2004, 12:20 p.m. EST, New York – Insurers are poised for a “golden age” that will eclipse their recent problems.[@@]
Steven Schwartz, a senior vice president in the Chicago office of Raymond James & Associates, gave that upbeat assessment at a recent meeting of the New York Society of Security Analysts.
Schwartz acknowledged that insurers have faced new accounting requirements, losses associated with guarantees in variable products and unfavorable tax treatment of insurance products.
President Bush made alternatives to variable annuities more appealing by lowering the tax rates on the other products, and consolidation continues to whittle away at the number of U.S. life insurers, Schwartz said.
But, despite all of those challenges, the “baby boomers are moving toward the industry,” Schwartz said.
Over the next 10 years, baby boomers with $4.4 trillion in assets, or 61% of current mutual fund assets, will reach retirement age, and those boomers will need life income products, immediate annuities and long term care products, Schwartz said.
Schwartz predicted boomers will make the period running from 2009 to 2050 a “golden age of life insurance.”
Insurers also will have a major opportunity in LTC insurance, once they get their pricing and assumptions right, Schwartz predicted.
Consumers are holding onto their policies, and some insurers are finding that lapse rates are lower than they had assumed, Schwartz said.
LTC products are complex, and “maybe the government needs to come in like in Medicare and create 10 policies that everyone understands,” Schwartz said.
Mark Thresher, president elect at Nationwide Financial Services Inc., Columbus, Ohio, also spoke at the analyst society meeting.
Thresher talked about opportunities in distributing products through Certified Public Accountants and about opportunities to sell accumulation and payout products. In addition, “we still see the life and retirement savings business as a significant growth business,” Thresher told the analysts at the meeting.
Like Schwartz, Thresher discussed the effects of the reduction in capital gains taxes on variable annuities.
Although taxes on other types of investments are now lower, it is important to cite the “advantages and protections that don’t come out of a mutual fund,” Thresher said.
Thresher also reported that Nationwide is getting its hands around another challenge that Schwartz discussed: managing the guaranteed benefits built into variable annuities.
In comments about Nationwide’s performance, Thresher said the company’s cost of capital ranges from 10% to 11%.
The company’s return on total capital is 13% to 14% for variable annuities and 10% to 11% for fixed annuities, Thresher said.
Nationwide’s ROE has climbed as high as 16% but has been driven down by a flagging VA market, he explained.
About industry consolidation, Thresher said that a good transaction should complement an existing business, not just provide scale. But he said Nationwide would look at opportunities for deals in the 401(k) business, where scale is especially important.