I always look forward to the Wall Street analysts’ panel during Standard & Poor’s annual insurance conference because the talk gets right to the heart of the matter. This year was no different, with the discussion tackling everything from variable annuities to CDS. It started with David Havens, a managing director with Hexagon Securities warning attendees that “it is way too early to say that the worst is over. We may be scraping the bottom, but some of the [current] problems may be weighing on the insurance industry for quite some time.”
That’s enough to get anyone’s attention. Just to make sure the crowded room was listening, Jimmy Bhullar, a senior life insurance analyst with J.P. Morgan followed with the observation that variable annuities do have a future. “The product has a future but I don’t know if some of the companies selling them have a future,” he remarked. Those that can do a good job of risk management will have a future ahead of them, he noted.
Part of the issue, are the generous terms carriers offered to distributors and generous guarantee terms in the product that can be as high as 7% return on the product, according to the discussion. For those who can offer ‘plain vanilla’ products without aggressive guarantees, there is a good future, Bhullar says.
When the issue turned to a discussion of accepting TARP money, there was a general opinion that accepting it was a negative for a company, suggesting an “underlying issue.” It was also noted that banks want to pay back TARP money to be free of any government requirements.
The impact of future inflation was also raised during the analysts’ discussion. Jay Cohen, a managing director of Bank of America-Merrill Lynch, cited risks such as the devaluing of financial assets and on the liability side, the impact on loss reserves. The real risk is not inflation so much as “surprising inflation,” he added.
On insurance linked securities, it was acknowledged that CAT bonds are on ice for a while. Havens explained that TALF related assets need to be securitized first before insurance related markets are securitized.