Variable Products Suffered During 3Q

With the reporting period for third quarter life insurers’ earnings now over, we sum up items of note for a quarter whose big story was the growl of the bear market in late August and early September.

Investors heard it too. Who doesn’t when the Standard & Poor's 500 index lost 6.3 percent in August? So it’s not surprising that variable products suffered at the expense of their fixed brethren.

Annuities

Remember the market swoon two months ago, which saw the S&P 500 index briefly shed as much as 10 percent of its value from its spring peak before bouncing back? This dealt a blow to variable annuities and the mutual funds held in them, said Dennis Glass, CEO of Lincoln Financial Group, one of the nation’s top variable annuity sellers.

“Spikes in volatility kill sales of those (variable annuity) products and consumers get more conservative,” Glass said during a recent conference call with analysts.

“We think that’s why variable annuity sales were dampened a little bit against volatility, it’s also why we think in part indexed annuities picked up a little share,” Glass also said in the conference call.

Lincoln reported third quarter net income of $227 million, a drop of 48 percent from the year-ago period.

Glass responded to a question about consumer appetite for the underperformance of risk managed funds within variable annuities by saying risk managed funds are designed to dampen volatility over longer time periods.

“I would characterize the last 90 days as unusual in that sense that you had so many V-shaped patterns to the S&P market in such a short period of time,” Glass said.

In the fixed index annuity segment, Ronald Grensteiner, president of American Equity Investment Life, expressed “dismay” at new indexing strategies offered by new competitors in the market.

“We believe these types of strategies detract from the real purpose of fixed indexed annuities and create an atmosphere of unrealistic expectation on behalf of the producers and the consumers,” Grensteiner said.

New indexes offered by competitors include the Barclays U.S. Low Volatility to Equity ER Index, the CROCI U.S. 5% Volatility Control Index, and the Morgan Stanley Europe, Australiana Far East index, he said.

American Equity Investment Holding Co., a top seller of fixed index annuities (FIAs), reported third quarter net income of $97.3 million compared to $67.8 million in the year-ago period, on record sales of $1.8 billion.

In addition, Grensteiner said competitors were getting more aggressive in the second half of the year with enticements to distributors.

“We’ve seen some companies introducing commission specials and others raising rates plus we have some new entrants in the market, which have been capturing some attention,” Grensteiner said in a conference call with analysts.

Security Benefit, which vowed to return to the market after a period of restructuring, has been rumored to be close to re-entering after private equity company Guggenheim Partners took a stake in the company in 2010.

“We haven’t seen anything official for them, but we have heard rumors on the street that they’re getting ready to relaunch some products as far as the timing and what that looks like … we don’t know,” said Ted Johnson, chief financial officer and treasurer of American Equity.

The other question analysts wanted to tease out of top insurance executives was how much the index annuity market is growing at the expense of the variable annuity industry, and which distribution channel was delivering the growth.

Grensteiner, citing LIMRA figures, said that in September variable annuity sales dropped to $10.2 billion from $10.8 billion while fixed index annuity sales rose to $5.3 billion from $4.8 billion.

Couple that with the fact that broker/dealers and banks are starting to write in smaller amounts a bigger share of fixed indexed annuity premiums and “I think it’s safe to say that we are getting more FIA business from those registered representatives,” he said.

Is this at the expense of variable annuities? “I don’t know, but we’ve always said we welcome the big companies that have been historically into the variable business. ” This means more competition, which is good for retail consumers, Grensteiner said.

Disability Insurance

In the disability insurance segment, Lincoln, which saw lower DI sales in the third quarter, is about 78 percent the way through the repricing of its disability book of business, company executives said.

Where does the company stand on year-end renewals?

Lincoln has been repricing its disability book because it was underpriced two years ago. However, on retained premiums, the company has achieved “really high middle single digit improvements in margins,” which the company said eventually will flow to its bottom line.

“With respect to the retention rate of business as we go through the next 60 to 90 days of repricing based on what we're doing, we would think the retention might be a little bit better than 60 percent, but will have to see,” chief financial officer Randy Freitag said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.