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Which Life and Annuity Deals Might Be Best for the Clients?

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In late January, there were three major transactions involving public companies announcing the sale of U.S. life insurers.

The first involved Allstate selling Allstate Life to Blackstone, at a loss of $3.1 billion. The second involved MassMutual acquiring two index annuity writers from American Financial, and the third involves a spinoff of Jackson National from Prudential of London.

These transactions, and dozens of others like them over the past few years, are all driven by the same market and regulatory forces: the effects of low bond yields and pending Generally Accepted Accounting Principles (GAAP) accounting rules on companies’ reserves for long-dated products like annuities, long-term care insurance, and universal life with secondary guarantees.

These forces have the largest impact on public companies that report to the SEC using GAAP accounting as explained in Financial Accounting Standards Board Accounting Standards Update, No. 2018-12, August 2018, entitled “Financial Services – Insurance (Topic 944).”

(Related: New Accounting Rules to Put Life Insurers on GAAP Reporting Rollercoaster)

There are important differences between some of these transactions and the others in terms of the likely impact for policyholders.

These transactions can be put into a larger context with the following two questions:

1. Why are so many companies with big annuity blocks selling or spinning them off now?

We have reached a point where the gravitational pull of low bond yields is about to collide with pending (more onerous) GAAP accounting rules for long-duration liabilities. This is causing public companies to sell off books of now-unprofitable business to non-public companies.

2. Are there some types of transactions that we should be more concerned about than others?

There are four key questions advisors should ask on behalf of their clients as they review how clients may be impacted by these transactions:

1. Does the company plan to continue to issue products of this kind to the public after the close?

2. What will the new ownership structure look like after the transaction? Will it be a mutual, a mutual holding company, a public stock company, or part of a private equity company’s portfolio of companies?

3. What does the current “real capital base” supporting the products in the issuing entity look like?

4. Are the primary reserves for the product in question based on primarily separate account values that the client owns and controls, or are they exclusively reliant on the general account of the carrier?

My view is that the best answers to the above questions from a policyholder perspective are:

Question 1: Yes, the policy my client has is a key offering of the company, and the company will continue to offer it.

Question 2: The policy is issued on the paper of a strong mutual company.

Question 3: The specific entity backing these policies has a strong balance sheet with real assets (as opposed to synthetic capital).

Question 4: The policy in question is a separate account product, where the primary benefits (and reserves) are derived from the value of these separate account assets.

Honest answers to these questions are a starting place for advising clients with existing products.

Albert Einstein said, “We cannot solve our problems with the same thinking we used when we created them.” Thoughtful insurance professionals need to think differently about future recommendations and “long-term alignment” of products that provide good value for consumers and sustainable profitability for the company issuing them. In this very low interest rate environment, it appears that variable products are central to achieving this balance as they are not tethered to a 3% bond yield.

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Larry J. RybkaLawrence J. Rybka, JD, CFP, is chairman and chief executive officer of Valmark Financial Group, which includes a broker-dealer, an investment advisor and Executive Insurance Agency. Valmark has helped place about $52 billion of life insurance death benefits and is managing insurance policies with about $8 billion in cash value. He is the co-author of Life Insurance 10X.