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Life and Annuity Issuers Tell Wall Street About Interest Rate Winter

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Insurance company executives say the current interest rate ice storm is hurting life and annuity sales.

Executives from American International Group Inc., Lincoln Financial, American Financial Group Inc. and FBL Financial Group Inc. have been talking about life insurance premium increases and annuity crediting rate cuts during conference calls with securities analysts.

(Related: Here’s Why Interest Rates Made Supporting Annuities Trickier for Ameriprise This Summer)

AIG executives, for example, told the analysts that AIG is still profitable, that they think their long-range economic assumptions are still valid, and that they’re happy with the company’s pricing strategy.

Kevin Hogan, AIG’s life and retirement chief executive officer, said lower interest rates are great for many types of investment income.

Sales of indexed annuities were strong in the third quarter, but “we expect lower levels of sales for certain products in the fourth quarter due to lower interest rates and the uncertain environment,” Hogan said.  “We expect lower sales of fixed annuities in the prevailing interest rate environment.”

Dennis Glass, Lincoln’s president, said Lincoln has cut the percentage of annuity sales coming from variable annuities with living benefits guarantees to about 50% of the total, from 70% five years ago.

Moving away from variable annuity guarantees Lincoln’s long-term risk profile, Glass said.

In the life insurance market, “we are now at a point where two-thirds of our sales are not meaningfully affected by the level of interest rates,” Glass said. “Nonetheless, we are making additional pricing changes, where needed, to reflect low interest rates.”

The executives made the comments during conference calls with securities analysts, while going over their earnings for the third quarter.

The Context

Ameriprise Financial Inc. was the first major issuer of interest-sensitive products to announce its earnings this quarter. It reported higher earnings on higher revenue Oct. 24. But Walter Berman, the company’s chief finance officer, said the company achieved those earnings in the face of wild swings in bond yields. At one point in the third quarter, the yield on 10-year Treasury notes plunged to 1.09%, down from 2.84% a year earlier.

Prudential Financial Inc. is preparing to announce its earnings later today. The list of insurers releasing earnings this week also includes Brighthouse Financial Inc. and Prudential Financial Inc.

The Earnings

American International Group Inc., New York (Stock symbol: AIG)

AIG is reporting $973 million in net income for the third quarter on $13 billion in revenue, compared with a $1.3 billion net loss on $11 billion in revenue for the third quarter of 2018.

Here’s what’s happening to the company’s life and individual retirement businesses:

  • Life Insurance Revenue: $1 billion (up from $809 million)
  • Life Pre-Tax Income: A $7 million loss (down from $16 million in operating profits)
  • Individual Retirement Revenue: $1.4 billion (up from $1.3 billion)
  • Individual Retirement Pre-Tax Income: $387 million (down from $393 million)

At AIG, assumption change effects will lead to “no dramatic changes relative to the size of our reserves,” Hogan said. “We do not see anything that changes our understanding of the inherent profitability of business. Nor do we see a need to change our pricing strategy.”

The overall effect of the assumption update was to increase overall earnings by $20 million, Hogan noted.

“We will remain disciplined with respect to product pricing and features and continue to deploy capital to available attractive new business opportunities,” Hogan said.

At the U.S. life business, “sales declined as we deemphasized guaranteed universal life sales in the current interest rate environment, and index universal life sales remain under pressure,” Hogan said.

Life mortality was up during the quarter, Hogan said. He said the increase in mortality should be viewed in the context of generally favorable mortality trends over the past two years.

Lincoln National Corp., Radnor, Pa. (Stock symbol: LNC)

The top-level company at Lincoln National does business under the name Lincoln Financial.

Lincoln is reporting a $161 million net loss for the third quarter on $4.7 billion in revenue, compared with $490 million in net income on $4.4 billion in revenue for the third quarter.

Here’s what happened to the results for Lincoln’s annuity and life insurance units, when compared with the results for the third quarter of 2018:

  • Annuity Revenue: $1.1 billion (unchanged)
  • Annuity Operating Income: $169 million (down from $302 million)
  • Annuity Commissions: $295 million (up from $278 million)
  • Life Revenue: $2.1 billion (up from $1.8 billion)
  • Life Operating Income: A $245 million loss (down from $176 million in net income)
  • Life Commissions: $212 million (up from $173 million)

Glass said during company’s earnings call that expanding the company’s product menu, by adding products such as variable annuities without living benefits guarantees, has helped the company appeal to insurance agents, brokers and wholesalers.

The company has also added customized products for two large distributors, and that has helped increase fixed annuity sales 15%, Glass said.

Both the number of clients and the number of producers have increased 12%, he said.

Glass said strong distribution has also helped boost life insurance sales.

The number of employees working with clients has increased 8%, to 300, Glass said.

“We are in every major life distribution channel, and over the past two years, over 66,000 independent producers have sold a Lincoln life insurance product,” Glass added.

Lincoln has been increasing term life and indexed universal life sales, and the company has been maintaining its leadership position the variable universal life and life-long-term care hybrid markets, he said.

But changes in assumptions cut operating earnings by $320 million, and lower interest rates accounted for $225 million of the assumption change effect, according to Randy Freitag, Lincoln’s chief financial officer.

Like AIG and FBL, Lincoln is reporting that life mortality was worse in the third quarter. Freitag said Lincoln found that rates for some older policies were out of whack.

“We brought them in line with the rest of the book,” Freitag said.

American Financial Group Inc., Cincinnati (Stock symbol: AFG)

American Financial is reporting $143 million in net income for the third quarter on $2.1 billion in revenue, compared with $204 million in net income on $2 billion in revenue for the third quarter of 2018.

  • Annuity Segment (Great American) Results:  The annuity unit is reporting $73 million in pre-tax income on $1.1 billion in annuity premiums, compared with $117 million in pre-tax income on $1.4 billion in total annuity premium for the year-earlier quarter.
  • Retail Annuity Premiums: $228 million (down from $371 million)
  • Revenue From Financial Institution Sales: $627 million (up from $574 million)

Carl Lindner, American Financial’s co-president, said during the company’s earnings call that lower interest rates will hurt the Great American annuity operations’ $3 billion in floating-rate investments.

“In response to the continued drop in market interest rates in 2019, we’ve implemented numerous crediting rate decreases on our products in order to maintain appropriate returns on annuity sales,” Carl Lindner said. “In addition to rate decreases on new annuity sales, we’ve also begun implementing renewal rate decreases on certain in-force annuity blocks of business.”

The crediting rate decreases will probably cause 2019 annuity sales to be down about 9% to 10% from the record sales the Great American recorded in 2018, Carl Lindner said.

Stephen Lindner, American Financial’s other co-president, said Great American’s competitive standing will depend on what other insurers do about their crediting rates.

“We’re going to do our best to adjust credit rates to earn our targeted rates of return. and hopefully our competitors are going to do the same thing,” Stephen Lindner said. “Historically, over time, they get disciplined, and our expectation would be that will be the case again this time around.”

FBL Financial Group Inc., West Des Moines, Iowa (Stock symbol: FFG)

FBL is reporting $25 million in net income for the third quarter on $185 million in revenue, compared with $31 million in net income on $188 million in revenue for the third quarter of 2018.

Here’s what happened to the company’s life and annuity operations, when compared with the third quarter of 2018:

  • Life Revenue: $105 million (down from $107 million)
  • Life Pre-Tax Adjusted Operating Income: $27 million (down from $38 million)
  • Life Sales Commissions: $4.5 million (up from $4.2 million)
  • Annuity Revenue: $51 million (down from $55 million)
  • Annuity Pre-Tax Adjusted Operating Income: $8.1 million (down from $18 million)
  • Annuity Sales Commissions: $405,000 (up from $374,000)

Donald Seibel, FBL’s chief financial officer, said during the company’s earnings call that universal life mortality was up in the third quarter. He didn’t say why mortality was up.

Scott Stice, the chief marketing officer, said that recruiting agents has been challenging, but that FBL has continued to focus on trying to recruit the right people and train them properly. “Our one-year retention’s well above the goal,” he said. “Our two-year retention’s above goal. We feel like we’re on pretty solid footing going forward.”

Stice also talked about the annuity pricing environment. He said “most” of the competitors in the annuity market have been “pretty rational.”

“There’s a handful of annuity products that kind of make you scratch your head, and certainly we’ve lost some business to that,” Stice said.


Links to earnings resources are available here for AIG, here for Lincoln, here for American Financial, and here for FBL.

— Read Principal Adjusts for Falling Treasury Rateson ThinkAdvisor.

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