Short-Term Focus has Adverse Impact on Retirement Income Product Development

Warren Buffett’s most recent shareholder letter focuses on the merits of productive assets such as equities in light of the current low interest rate environment and the potential for future inflation.

Buffett’s view is that although productive assets are variable and volatile, they are more likely to preserve future purchasing power than the fixed or currency-based alternatives.

Buffett’s advice would seem to provide a key take-away for the head of any life insurance company: introduce or enhance a variable annuity product line.

What has actually taken place over the past year is the exact opposite.  Industry capacity is shrinking as life insurers are paring-back existing variable annuity products or exiting the product line entirely.

Recent capital market volatility and super low interest rates have created real financial pain for many life insurers over the past couple of quarters of earnings.  The pain is especially acute for public companies.

It seems a bit misguided, though, to let a couple quarters of anomalous earnings drive business decisions that will play-out over years or even decades.

The most recent earnings from Australian financial services company Challenger illustrate this “forest for the trees” mind-set.  Consider some of the following Challenger results:

  • 74 percent growth in annuity business to $1.3 billion.
  • Raising guidance in its life business from 25 percent to 30 percent.
  • Normalized net profit up 5 percent to $126.7 million.
  • Assets under management up $5.8 billion to $27.7 billion.

Analysts chose to focus on Challenger’s decision to book a $107 million loss on investments in light of market volatility during the second half of 2011:

"Looks bad.  Not a good result at all.  You have to wonder about the stock's defensive characteristics after these numbers."

Analysts also expressed concerns about the rising cost of manufacturing and distributing annuity products.  This concern seems a bit odd in a hugely concentrated industry that is dominated by a handful of companies as costs will likely be passed right along to consumers.

The global retirement income opportunity will play-out over several decades and is supported by very large, secular trends.  Business decisions based on a couple quarters of capital market volatility represent a huge mismatch given the nature of the opportunity.

Sources: The Sydney Morning Herald