Summary
Investment companies are looking to invest in insurers 1. Consider the companies liabilities and markets before making the investment. 2.Is the temporary state of the economy enough to carry sustainable earning power of insurers selling annuities
Analysis
Variable and fixed annuity products are in vogue right now. This year in the second quarter of 2008 annuity sales were $15.6 billion almost doubling last year’s sales in the same period. Annuities are tax deferred contracts bought once or with a series of payments that offer the owners a lump sum or series of payouts after an accumulation period. Unlike other retirement vehicles such as an IRA or 401 k, annuities have no legal limits on tax deferred contributions. Tax deferral makes annuities very attractive to consumers and they are being buoyed in this time by several other obvious factors1. Market Turmoil2. Consumers generally find annuities easy to understand and manage3. Annuities offer a guaranteed return and modest positive return even if the markets are head over heels.4. Insurers and financial companies are offering all types of fixed riders that are attached to the annuity like guaranteed interest riders, death benefit riders, and long Term care riders.5. Insurers and financial firms are offering Annuity Academies to better educate agents and brokers providing CE credits and overall promotion techniques for marketing product.6. Products are considered secure and well regulated by state insurance departments What does this mean to you the investor who may be considering a stake in an insurer or annuity business? Is this market temporary or short lived till confidence returns to the market? Will the annuity market lose its luster?Products are becoming more sophisticated and will offer very competitive returns that are tax deferred and yet secure thereby improving the market life of annuities. Also the inherent flexibility of the product makes for multiple sales to the same client. What is of concern for your investment is the insurance company’s liability to honor fixed riders and commitments made on bonus points for consumers. This can affect leverage ratios, cash and reserves. You should ask about the length of the contracts the company is selling in relation to the demographics of their market share and the schedule of these liabilities coming due and make a determination as to how that will affect your investment. Also should the insurer not be continuing to develop new competitive annuity products and have the ability to keep new premium coming in this can affect reserves and leverage.The sales effort the insurer or financial firm employs plays an important role in the profitability of this new business effort. Review the insurer’s ongoing support for brokers their plans for market expansion and designing products that will meet the needs of consumers. Expanding their broker network with broker s that service profitable market segments is key, having a steady flow of new premium is needed to support commitments. Consider the acumen and capability of the brokers the company uses to market their annuity line. Car insurance and home insurance require a different set of skills and knowledge then annuity sales and specialty brokers are needed for this kind of ongoing supportive effort.Factor in commissions and sales fees and expenses and how they affect payouts as well as previous commission commitments that are on the books and the timing for paying these commissions. It is also important to ask management about their ongoing plan and continued marketing under a series of market conditions before making an investment for example when equity markets come into favor. Finally look for protections and safeguards that the insurer has in place within the annuity contract itself to protect the company’s finances as well as the overall payout timetables. The annuity business offers a market opportunity for investors interested in investing in the firms that service the market effectively, yet an investment in this type of firm requires having a complete perspective to capitalize on the values they offer.
