Annuity sales may have been fine this summer, but wild interest rate fluctuations made the third quarter a tough time to manage the investments supporting annuity obligations.
Walter Berman, the chief financial officer of Ameriprise Financial Inc., talked about the third-quarter rate rollercoaster Thursday, during a conference call the company held to go over third-quarter performance with securities analysts.
The Minneapolis-based company is reporting $543 million in net income for the third quarter on $3.3 billion in revenue, up from $503 million in net income on $3.3 billion in revenue for the third quarter of 2018.
The company’s annuity unit reported $120 million in operating earnings for the latest quarter on $617 million in revenue, compared with $129 million in operating income on $628 million in revenue for the year-earlier quarter.
The company’s protection segment, which sells life insurance and disability insurance, is reporting $57 million in operating income on $265 million in revenue, compared with $60 million in operating income on $328 million in revenue.
Here’s what happened to net flows for annuities, and life insurance product sales:
- Variable Annuities: Net outflows of cash fell to $691 million, on a beginning balance of $78 billion, from $826 million in net outflows, on a beginning balance of $78 billion, in the year-earlier quarter.
- Fixed Annuities: Net outflows increased to $511 million, on a beginning balance of $8.7 billion, from $199 million in net outflows, on a beginning balance of $9 billion, in the year-earlier quarter.
- Variable Universal Life and Universal Life: Cash sales fell to $74 million, from $79 million
- Term and Whole Life: Cash sales held steady at $2 million
- Disability Insurance: Cash sales held steady at $1 million.
Jim Cracchiolo, the chief executive officer, said during the call that the company is happy with its asset management and insurance and annuity businesses.
“These are well-managed, highly profitable businesses that deliver strong free cash flow and play an important role in how we serve our clients,” Cracchiolo said.
But rates fell sharply over the summer.
Cracchiolo said that low interest rates hurt universal life sales, but that the introduction of a new variable universal life product helped increase VUL sales.
“Overall, sales remained stable and helped to replenish the book,” Cracchiolo said. “We’re focusing on managing risk appropriately and ensuring we have the right product designed for the environment.”
Ameriprise is continuing to strengthen a program that protects the company’s variable annuity business against ups and downs in the investment markets, and it’s also adjusting some product features to manage risk, Cracchiolo said.
One way an insurer manages the risk associated with an indexed product or a fully variable product is to impose a “cap rate,” or a limit on how much of the investment index or investment portfolio gains the customer gets to keep.
Ameriprise has been lowering the cap rates on some indexed universal life products, and it has adjusted variable annuity prices and benefit designs, Cracchiolo said.
Interest Rate Assumption Unlocking
Under modern accounting rules, life insurers make assumptions about how long-duration products, such as annuities and long-term care insurance policies, will perform. Managers regularly review the assumptions to see whether the assumptions are still reasonable.
Companies may “unlock the assumptions,” and record gains or charges, when they feel they must change their assumptions.