Chicago —
Fitch's Special Report, “2008 Financial Turmoil Increases Variable Annuity Risk,” summarizes Fitch's views on the variable annuity market, including a summary of current market trends, an examination of the key risks, and an assessment of capital needed to support the variable annuity business given recent market performance.
Fitch estimates that capital (and reserves) needed to support the variable annuity business in the United States has increased by up to $15 billion during 2008 year-to-date, due to the dramatic decline in the equity markets. At the same time, earnings have been negatively affected due to lower fee income from declines in net asset values, higher hedging costs and increased reserve requirements to support the product guarantees.
“Equity market performance in 2008 constitutes a significant stress scenario for variable annuity writers in the United States,” says Douglas Meyer, a managing director in Fitch's U.S. insurance group. 'We are concerned that insurers are overly optimistic about the effectiveness of their hedging programs, which are designed to mitigate the losses associated with a downturn in the equity market. Challenges brought on by unfavorable market conditions will likely drive further consolidation in the variable annuity market.'
Source: Business Wire