The life insurance sector earnings story for the third quarter does not bode well for a particularly robust 2006, according to 2 analysts.[@@]

Suneet Kamath, senior life insurance analyst for Bernstein Research Inc., says low new-money yields marred the quarter in spite of favorable equity market trends.

He sees other factors, too, that ultimately may spell growth challenges for 2006.

“We remain concerned that the second quarter of 2005 increase in variable annuity outflows could reflect the fact that much of the business sold in the 1990s now has low withdrawal penalties,” Kamath writes.

In addition, one-time items boosted third quarter earning figures, he says.

“Our concern is that if these unusual items are driving positive revisions, and if these revisions are in turn driving relative stock price performance, the life sector may trade off as they disappear or turn negative,” Kamath writes.

Among life insurance products, universal life with no-lapse guarantees will dominate the sales picture, Kamath believes.

Andrew Kligerman, senior life insurance analyst for UBS, thinks third-quarter trends proved modestly favorable, with some notable exceptions.

As an example, he expects year-over-year VA sales will flatten in the quarter due to increased regulatory scrutiny over suitability issues.

But Kligerman says some insurers should buck industry trends and experience “meaningful” VA growth in the quarter.

Fixed annuity sales will fall over 10% in the quarter due to the flattening yield curve, which will make it difficult for insurers to competitively price spread-based products, since these products “are generally based on short-term crediting rates and long-term investments,” Kligerman writes.