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Life Insurer Sees Opportunity in the Rubble

Life insurers offering variable annuities have been hit hard in the economic meltdown, but the head of Allianz's life insurance unit is bullish on the sector.

Life insurers seemed to be one of the safe havens as the financial crisis unfolded, until it came to light earlier this month that the federal government was preparing to open its bailout coffers to the sector.

Though life insurers tend to make relatively "safe" investments, nearly all assets have lost significant value as the economy has deteriorated. As a result, the corporate bonds, mortgage-backed securities, equities and derivative products that life insurers used to offset liabilities have taken significant writedowns.

The biggest shoe to drop has been within the variable annuities business. Salespeople made sweetened offers to woo customers amid heightened competition, including promises of minimum returns, regardless of what happened to underlying assets. Now those annuities are upside down, with life insurers required to pay out far more than the products are worth.

Although insurers aren't required to make most of those payments for a decade or more, the


is expected to provide funds from its Troubled Asset Relief Program to some life insurers to act as a cushion against losses. Among those expected to capitalize on the program are companies like




Hartford Financial



Lincoln National


, which registered as bank holding companies to quality.

Genworth Financial


was once a contender as well, but its application to register as a bank holding company will not be approved in time.



has said it does not intend to seek federal funds.

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Gary Bhojwani, chief executive of the North American life insurance division of German insurance giant



spoke with

about headwinds facing the industry. Variable annuities hit his division last year -- the portfolio lost $238 million, net of hedging. However, Bhojwani has a bullish long-term outlook for the life insurance business, as consumers continue to seek safe, conservative options for retirement and beyond. Can you explain how Allianz has been affected by variable annuities, and whether you're planning on taking any government money to handle it?

Variable annuities account for about one-third of the business, roughly, for Allianz Life Insurance Company of North America...

But the group as a whole, when you think about Allianz, has not been materially impacted by VAs...The second part of your question was pertaining to government funds, and no, we do not have any present intentions to seek government assistance.

Hindsight is 20/20, but it seems kind of strange that you'd guarantee payments no matter what happens to underlying assets. Can you explain the logic behind it, or how it seemed at the time?

When you ask the question, 'How can you provide a guarantee?,' if you really think about it in a very simplistic way, all of insurance works that way. You take in a finite amount of money from the consumer, you bank on being able to make certain investments, and have certain other actuarial assumptions such as how many of the people are going to live for 5 years vs. 30 years, and you make payments. At its core, that's what insurance does.

Now, in the case of variable annuities...for the last five years or so, it's been referred to as an arms race, where, in a quest to win market share, many of the variable annuity players offered richer and richer guarantees and had more bells and whistles on the products.

So the fundamental premise that you can take in money and still pay out something that's attractive to the consumer, that still works, because over the long term, investment markets work, corporate bonds work... Where it started to come apart was two things. No. 1, some of the benefits and guarantees simply got too rich, and No. 2, I think it's pretty safe to say that pretty much no one expected or built their products in such a way that they could handle this magnitude of a storm, when you look at everything that has gone badly at the same time.

AUDIO: 'The Arms Race Is Over.'

Can you talk a little bit about what the response from customers has been, amid all the turmoil with AIG (AIG) and life insurance in general?

There's a really set of mixed emotions or mixed reviews. On the one hand, many consumers are understandably just afraid. They're looking around saying, 'Boy, which company is still going to be around? Where do I invest my money? What stocks do I buy? What annuities do I buy?' If anything, there's a fair bit of paralysis. Many consumers just aren't doing anything.

The flip side of that, those consumers, once they realize or get comfortable with the fact that there's safety, say with Allianz, we've actually seen demand grow. And I believe the main reason is very simple: What other products out there are offering guaranteed income for the rest of your life?

If anything, our products right now look more attractive, and we've seen that reflected in our demand for our products. Now here, I'm not just referring to variable annuities; I'm referring to the collective portfolio of all of our annuities -- our fixed annuities, our fixed-index annuities and so on.

If we look collectively at our product portfolio, if anything we've seen consumers that are realizing that where our relatively conservative philosophy didn't look so attractive in a raging bull market, suddenly that relatively conservative philosophy, that predictable income, that guarantee of income, suddenly that looks very, very attractive.

It seems like people have eased up a bit and are sitting back and taking inventory of what's going on.

We absolutely continue to be very bullish on it and I think it's really important to remember in these times of all of this uncertainty... I think it's really worthwhile to note that no death benefit from a life insurer has ever been denied due to a company's insolvency.

So as much as there may be fear or paralysis in the markets right now, life insurers have historically been a very safe place. Not, you know, always aggressive and sexy, but a very safe place to get a predictable return. And these products in particular, to provide guaranteed income for life, those are very attractive propositions when you consider what just happened din the equity markets and what is happening in the demographics of our country.

AUDIO: Less Consumers Are 'Paralyzed.'