After some short-term speed bumps, it’s a wide open road for life insurers, according to Steven Schwartz, a senior vice president in the Chicago office of Raymond James & Associates.
Schwartz made his remarks during the 10th annual insurance conference here of the New York Society of Security Analysts.
In the short term, Schwartz says, life insurers have challenges that include the impact guarantees will have on products, pressures created by rating agency expectations and regulatory requirements, a low interest rate environment, and “perplexing” stock valuations.
But when baby boomers start hitting retirement age and need the products and services of life insurers to help with income and estate planning, the road opens up, Schwartz says.
Guarantees offered as part of variable annuities are popular features with the public, he says, but the real question is “are they priced appropriately?” That question is more important today because of the dearth of reinsurance available for these products, he adds.
Schwartz also says indications are that variable annuity inflows are weak with a lot of sales flows coming from existing business. Indications are that new cash flows have slowed, he adds.
Indexed annuity products are the bright side of the story, Schwartz says, but even this segment of the market might show slower sales once fourth quarter sales are in. The reason for this, he says, is a flat yield curve which makes other financial products as attractive for the consumer.
The current interest rate environment is also causing older life insurance fixed rate business with guarantees of 4%-5% to have margins squeezed between what is paid and what companies can earn on their investments, he notes.
Schwartz says rating agencies have a powerful influence over how life insurance companies operate to the point that they even indirectly affect some companies’ earnings and stock prices.
A “daunting” investment environment is making products such as certificates of deposit competitive with insurance products such as guaranteed investment contracts, fixed rate annuities and structured settlements, he adds.
On the legal and regulatory front, Schwartz notes the favorable tax treatment including cuts in capital gains that were not extended to variable annuities by the Bush administration as well as a new proposal for tax-qualified accounts that has disadvantaged the life insurance industry.