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Annuity Players Continue to Fight Low Rates

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Publicly traded annuity market players are continuing to fight the effects of low interest rates and uncertainty about federal annuity sales rules.

Financial problems at shopping centers could still hurt the companies’ investments in mortgages, mortgage-backed securities and real estate.

(Related: Ameriprise Gets a Real Estate Exposure Question)

At this point, however, the players that have reported first-quarter earnings look solid. CNO Financial Group Inc. and Reinsurance Group of America Inc. increased net income. CNO even managed to increase first-year annualized premium revenue from new annuities sales.

Here’s a look at the highlights from the latest annuity player earnings announcements, based on information from their earnings releases, earnings release supplements and conference calls with securities analysts. All of the companies have posted recordings of their quarterly earnings conference calls on the investor relations sections of their websites.

CNO Financial Group Inc.

CNO, a Carmel, Indiana-based insurer, is reporting $62 million in net income for the first quarter on $1.1 billion in revenue, up from $46 million in net income on $960 million in revenue for the first quarter of 2016.

Annualized premiums from new products sales increased to $18 million, from $16 million, for Medicare supplement products; to $24.8 million, from $23.5 million, for supplemental health products other than Medicare supplemental insurance; and to $6.9 million, from $6.1 million, for long-term care insurance.

First-year collected premiums for annuities increased to $256 million, from $232 million, and total annuity account value increased to $8.3 billion, from $8 billion.

The “new money rate,” or average yield on newly invested assets, increased to 5.23% during the quarter, from 4.9% a year earlier.

Because rates have been so low for so long, however, the average earned yield fell to 5.42%, from 5.47.%.

Ed Bonach, CNO’s chief executive officer, hinted during the company’s earnings call that it might have made some kind of deal to reduce its exposure to stand-alone long-term care insurance. “There continues to be strong, viable interest,” Bonach said. “There are definitely are qualified players, higher-rated reinsurers and counterparties that have interest.” Bonach hinted he might have more to stay about an LTCI deal in June.

Gary Bhojwani, CNO’s president, said annuity sales are up partly because of the company is working to get more of its agents licensed to sell securities, and the agents’ average level of sales is increasing.

LPL Financial Holdings Inc.

LPL, a San Diego-based broker, is reporting $48 million in net income for the latest quarter on $1 billion in revenue, compared with $50 million in net income on $1 billion in revenue for the first quarter of 2016.

Puzzle piece (Photo: Shutterstock)

Trailing commissions from in-force fixed annuities increased 133% year-over-year, to $4.8 million, and trailing commissions from in-force variable annuities rose 8%, to $116 million.

Commissions from new contract sales fell 36% for fixed annuities, to $32 million, and 21% for variable annuities, to $51 million.

Dan Arnold, LPL’s president, said the drop in variable annuity commission revenue is the result of a variable annuity commission pricing change the company announced last fall. The company eliminated its old 7% upfront commission structure Jan. 1.

The remaining variable annuity options have lower upfront commissions, with trailing commissions, and that should lead to an increase in variable annuity trailing commission revenue over time, Arnold said.

Arnold said he thinks implementation of the U.S. Department of Labor fiduciary rule would create opportunities for LPL. LPL expects the shift to lead to movement of advisors, assets and broker-dealers.

“Regulatory changes could drive consolidation in the broker-dealer landscape, as it becomes more difficult to successfully compete,” Arnold said. “We believe we’re well positioned to capitalize on opportunities as the industry evolves.”

Principal Financial Group Inc.

Principal, a life insurer based in Des Moines, Iowa, is reporting $354 million in net income for the first quarter on $3 billion in revenue, compared with $369 million in net income on $3 billion in revenue for the first quarter of 2016.

The company saw net inflow of $2.7 billion at its annuity operations, down from net inflow of $4.1 billion in the year-earlier quarter.

Total annuity account value increased to $242 billion, from $216 billion.

The company’s annualized investment yield, before tax, inched up, to $4.8%, from 4.4% during the first quarter of 2016.

Principal has plenty of capital. In theory, the company could expand its retirement and income solutions unit quickly, by buying blocks of in-force annuity contracts from other companies.

Daniel Houston, Principal’s chief executive officer, said that, in reality, the annuity block deals that are out there look expensive.

“There’s a lot of inflated values,” Houston said.

That holds for blocks of life insurance business as well as blocks of annuity business, Houston said.

Reinsurance Group of America Inc.

The Chesterfield, Missouri-based life reinsurer is reporting $146 million in net income for the first quarter on $3 billion in revenue, up from $76 million in net income on $2.5 billion in revenue for the first quarter of 2016.

RGA’s average investment yield fell to 4.41% during the quarter, from 4.46% a year earlier.

RGA has about $1.2 billion in extra capital it could use to make big reinsurance deals.

Anna Manning, RGA’s chief executive officer, said RGA is interested in longevity business, but more interested in mortality-driven business.

She said the company will consider reinsuring blocks of long-term care insurance business but had not found a block of in-force LTCI business it liked in the past. “We concluded after a few years that the likelihood of finding a deal where we could be successful was pretty low,” Manning said. “So we essentially stopped pursuing those type of deals…. We’ve taken a conservative approach at looking at legacy blocks, and we’re going to continue to take that conservative approach to any opportunities that arise.”

— Read The Glory Days Are Over: 4 Tips for Investing in a Low-Return World on ThinkAdvisor.


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