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Will All Annuity Issuers Move to Bermuda?

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What You Need to Know

  • Accounting rules and tax bills and germs — oh, my!
  • Maybe insurtech could help.
  • Maybe interest rates could help.

Many Americans who are planning for retirement would love to live in Bermuda, and so would many of the life insurers that provide their annuities.

This raises a critical question that has helped shape annuity issuer coverage this year and will continue to shape issuer coverage in 2022: Will all of the publicly traded U.S. annuity issuers become digital nomads, and end up sharing a swanky beach villa in Hamilton, Bermuda? (There’s a nice one on Airbnb, on 5.5 acres of unspoiled landscape, for $15,000 per night.)

The Financial Accounting Standards Board is moving toward making the big, publicly traded U.S. life insurers put more of the fluctuations in the estimated value of their assets, liabilities and risk management arrangements in quarterly earnings.

The quarterly reports annuity issuers send to insurance regulators and rating agencies might look as smooth as ever, but the shift to “mark-to-market” accounting can make the reports investors see look like the result of a battle between King Kong and Godzilla. A company might report $1 billion in net income one month and $3 billion in net losses three months later, even though the flow of cash into the company, the flow of cash out and growth in reserves are about the same.

Or, as Fitch Ratings analysts put it: “Fitch expects new, more punitive GAAP accounting rules, Long-Duration Targeted Improvements (LDTI), effective in 2023, will factor into management strategies on in-force businesses in 2022. The new GAAP accounting rules represent the most significant change in the history of the U.S. life insurance industry.”

Some publicly traded life insurers have responded to the new, mark-to-market accounting pressure by getting themselves acquired by policyholder-owned mutual life insurers, which need not report quarterly earnings in FASB’s U.S. generally accepted accounting principles format.

Other annuity issuers have sold themselves to property and casualty insurers, which might have investors that are more used to earnings volatility, or to publicly traded investment companies that have found ways to present life insurers’ quarterly earnings in a pleasing light.

But the most popular strategy seems to be for U.S.-based life insurers, with earnings reports that flow into the cold GAAP mark-to-market light on the Securities and Exchange Commission’s Edgar system, to be acquired by private equity companies based in Hamilton, Bermuda. Bermuda has insurance regulators, too, and the life insurers based there still have to show their financial statements to state insurance regulators and rating agencies.

The idea is that the regulators and the rating analysts are better than retail investors and mutual fund managers at seeing through what GAAP does to mark-to-market wrinkles, pimples and pot bellies, and appreciating the graceful longevity risk management souls within.

But will it turn out that consumers and financial professionals would prefer to get a better look at the mark-to-market pimples?

Here are six other key questions we expect to shape our annuity market coverage in the coming year.

Will the Build Back Better Act break annuities?

Many versions of H.R. 5376, the Build Back Better Act, include complicated provisions that could, for example, update the “base erosion and anti-abuse tax.”

The new, updated base erosion and anti-abuse tax might affect life insurers that have subtracted indemnity insurance payments or reinsurance payments from the total amount of premiums and other considerations on insurance and annuity contracts.

Other provisions will affect loss carryforward rules.

Figuring out whether those types of changes are big problems, minor nuisances or nonevents for annuity issuers could take  time.

Will increasing longevity continue to be something people think about?

Many annuity agents and advisors work hard to help clients understand annuity risk.

The National Association of Insurance Commissioners, the Society of Actuaries and the American Academy of Actuaries work hard on factoring mortality improvement into the math behind life insurance policies, pension plans and individual annuities.

The COVID-19 pandemic, which is now almost 2 years old and which is continuing to increase excess U.S. mortality, has raise a sobering question about longevity risk: What if additional waves of COVID-19 make longevity … a less common concern?

Will new, employer-sponsored annuitization programs help retail financial professionals, or hurt them?

This will be the first year when provisions in the Setting Every Community Up for Retirement Enhancement Act of 2019 (Secure Act) that promote use of multiple employer retirement plans and the addition of annuitization features to 401(k) plans have much of a direct effect on retirement plans.

Many insurers, such as Equitable, Prudential, TIAA and Transamerica, have been working to set up the structures needed to operate in the new Secure Act world.

OneAmerica, for example, recently introduced OneConnect, a program that provides the fiduciary oversight needed for a multiple employer plan program. OneAmerica notes in the program announcement that a MEP will need a trustee, a pooled plan provider, an investment oversight fiduciary and a federal law compliance trustee.

Life insurers, annuity agents, fee-based advisors who help clients with annuities, plan administrators and others will start to see how a Secure Act world affects them.

Will regular people pay for retirement planning advice, when they can blow their spare cash on Amazon Prime, without paying any fees at all?

The U.S. Department of Labor is talking about reviving the old, Obama-era retirement product advice regulation.

An SEC member appointed by then-President Donald Trump recently sounded cool toward the idea of annuity sellers collecting sales commissions.

Meanwhile, distributors of cellphone contracts, online games, sugary soft drinks, vaping products and hard liquor can use whatever sales incentives they can to eliminate any possibility of consumers having retirement savings of any kind.

Will commission-based annuity agents continue to face more onerous compensation rules — for selling annuities that might be fine, but not the very best annuities ever created — than sales clerks at recreational marijuana dispensaries?

Will insurtech help?

Annuity issuers, distributors and retailers have been moving toward making it possible to buy annuities online, in part because of pressure from the COVID-19 pandemic-related social distancing efforts.

Will consumers buy more annuities going forward if they have an easier time learning about annuities online and, possibly, making the purchases online?

Will interest rates ride up to annuity issuers’ rescue?

For U.S. annuity issuers, persistent low rates are bad, because issuers depend on income from investments in high-grade corporate bonds and other fixed-rate instruments to help meet annuity benefits obligations.

Everyone seems to have decided that a “lower for longer” world is here to stay, possibly because of trends that have lasted for 708 years.

But “past performance is no guarantee of future of results,” and markets and economic indicators can shock investors by walking in strange new directions. Will this be the year when interest rates walk through a tachyonic cryptocurrency string theory wormhole, into another space-time-yield dimension?

How We Did Two Years Ago

The last time we did a similar article was in late 2019.

Here are the questions we came up with for 2020, and how we’d answer those questions in hindsight.

1. Will the provisions in the Secure Act that promote use of annuitization options in retirement plans, and the provisions that promote the creation of multiple employer retirement plans, help retail life and annuity agents?

Answer: Incomplete.

2. Will interest rates be helpful?

Answer: Not yet.

3. Will the Financial Accounting Standards Board actually implement any tough new accounting rules?

Answer: Apparently so.

4. Will deferred income annuities find loving homes?

Answer: Not yet.

5. Are any of the web-based annuity brokers selling many annuities?

Answer: Probably. Websites like Gainsbridge, and MassMutual’s Blueprint Income look busy.


Hamilton, Bermuda. (Photo: Andrew F. Kazmierski/Shutterstock)


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