Will Some Annuities Melt Away? Earlebird.com

I’ll come out and say it: it’s almost impossible for an annuity company to make money building and selling annuity products. In fact, I think I’d rather own airline stock than try to make money with life insurance company shares.

Insurance companies create new products, build these products off actuarial projections, spend millions in set-up and marketing, then wait for the business to roll in. The insurer usually becomes too aggressive with the new products or they take the too-conservative road.

If the annuity is priced aggressively, business can and will come in quickly. Management gets giddy, and they high-five each other for weeks. The company hires new back office staff to process all the new business. The company tries hard, but customer service still falls apart. The cycle continues for six months or so, usually until someone in accounting or a new consultant asks how the hell they are going to make money paying these rates. When the facts emerge, the company runs to the exit door. It turns into an expensive lesson learned.

A real-life example of such a lesson: Kemper Investors sold a popular variable annuity feature on their “generous” variable annuity. Since it was a variable annuity, and because the mistake was buried deep within the product, no executives discovered this expensive feature until several billion dollars’ worth of product was sold. Kemper spent about two and a half years selling a mis-priced variable annuity. Want to know how it happened? The vice president who developed the product supervised the product’s pricing, and get this, he also got bonused off product production. Priceless. This VP is now president of a small Midwestern insurance company. I knew he was smart, but not that smart.

The conservative scenario results from hearing about or living through the above-mentioned experience. Management doesn’t want pricing mistakes so they dot their I’s and cross their T’s, making sure the new products are priced fairly and supervised properly. The big problem is not having career agents selling the products. Independent agents must be wooed to sell the new offerings. If the product is fairly priced and offers no special bells and whistles for the sales agent or customer, why would an agent stop selling what’s working for him to sell an untested new product? If you’re a newcomer trying to enter the annuity market, an average product will get you no business. The company will make no profits and the executives will make no production bonuses. At least you’re not losing millions, and maybe you’ll keep your jobs.

Even the day-in, day-out annuity business has been rough for insurers. Companies have to pay clients competitive interest rates and pay agents a fair commission for business to come in the doors. After paying commission, on average, a company wants to make 1 percent per year on customers’ deposits. Due to recent interest rate compression, however, insurers are making half that amount. The bottom line is, at least they’re still making money.

Things have changed. It seems we have a crisis every other year. First, we saw the tech bubble, then Enron and Global Crossing, and later mortgages and securitized debt, and bad Greek, Irish and Italian bonds. I’ll sum it up this way: annuity/insurance companies make nickels and dimes for years until a crisis hits. Then the nickels and dimes are wiped away by big dollar losses. Companies just can’t make money long term in annuities due to the fallout from financial meltdowns.

The latest example is Hartford Insurance Corporation. Hartford Insurance has been one of the biggest annuity sellers for years, but that’s coming to an end. A hedge fund manager named John Paulson demanded Hartford start maximizing profits and optimizing assets. He wants Hartford to jettison their “waste-of-time businesses” and focus on more profitable businesses. As a result, Hartford says they are quitting the annuity business. Is this just the beginning of the end for the annuity industry? How will this affect future products? I’m not sure, but I do know there will be more companies leaving than entering the annuity business. Consolidation in the industry is underway, due mostly to angry shareholders who have said “no mas” to poor profits. A hedge fund manager will wait only so long.

Pay-it Forward:

Have your son or daughter respect the credit card. After every purchase of $50 or more, suggest that they go online and pay off the transaction immediately. Seeing how each purchase boosts your credit card bill can be painful. Have them pay as they go. It works!

Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

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