While deregulation boosted annuity sales in 2018 and may lift long-term defined contribution sales, “re-regulation” of annuities via the Securities and Exchange Commission advice rules along with state fiduciary rules and an anticipated National Association of Insurance Commissioners’ annuity sales suitability framework could dampen VA sales, Credit Suisse analysts predict.
Despite some regulatory pressure and equity market sensitivity, an increased focus on retirement products could be beneficial for life insurers’ asset portfolios if it leads to more access to these products, according to a new Credit Suisse Report, titled “Life Does Not Appear To Be Dead.”
“Shifting regulation has driven strong annuity sales in 2018 year-to-date and could further boost retirement products and assets longer-term,” stated the report, released Wednesday and written by life insurance equity analysts led by Andrew Kligerman.
While the vacated Labor Department fiduciary standard is likely to boost long-term sales of defined contribution products, according to the sector forecast, the analysts see headwinds from equity market volatility and from potential regulation.
For instance, the analysts note state insurance departments’ activity to impose a fiduciary standard on the sale of annuities combined with the SEC proposed best-interest standard “could dampen sales,” according to the report.
Recent interest by Congress in the retirement savings planning arena could also bolster life insurers in the long term if legislation results in action that allows greater access to 401(k)s and other savings products by employees, according to the report.
The NAIC had been working on an annuity sales suitability framework and was attempting to coordinate with the SEC last year, but the new year, under new NAIC life insurance and annuities committee leadership, could hasten, change or halt the state-led process or keep it on course.
The new NAIC president, Maine Insurance Superintendent Eric Cioppa, is expected to appoint NAIC committee leadership at the annual winter commissioners meeting, which will be held in early February in California.
Also looming are financial accounting standard reforms anticipated for 2021 implementation that could constrain capital if the changes aren’t clear to investors, the Credit Suisse report suggested.
The analyst team made clear it had garnered some of its insight from a conference call in December with Moody’s Corp.
The rating agency warned of the potential for “re-regulation” of the annuity industry from the NAIC and the SEC in its call, according to Credit Suisse.
Credit Suisse singled out MetLife and Voya not only for solid future returns and high cash-flow businesses but as the beneficiaries of regulatory outcomes, noting both companies have jettisoned their variable annuity businesses and have share repurchases on the horizon.
Although Voya earnings appear to be somewhat tied to equity market returns, the insurer is now less exposed to equity volatility with its VA business divestiture, the report noted.
The analysts identified the most equity-sensitive life insurers as Brighthouse Financial, AXA Equitable Holdings Inc., Lincoln National and Prudential Financial, all of which make more than 25% of their earnings from VAs, they stated.
The life sector fell more than 25% in 2018, Credit Suisse noted. That’s compared to the S&P 500’s 6% decline. This reflects apparent concern over credit and interest rate exposure; equity market weakness and volatility; potential charges on VA business and on long-term care insurance and the uncertain regulatory environment, according to the analyst report.
However, the report argues for solid fundamentals in the business.