5 Reasons Annuity Issuers Want Us to Stop Worrying

The world, the stock market and banks went through some things in the first quarter. Accounting rules made life insurers put estimates of future fluctuations in the value of assets and benefits in current earnings, and that made some life insurers’ net income figures look awful.

Lincoln Financial, for example, reported a $909 million net loss for the first quarter, but $260 million in adjusted income from operations, and $883 million of the net losses were the result of the “mark to market” account rules.

Sales were generally great, and investment portfolios muddled through with lower asset values but with low default rates and wider spreads between the annuity issuers’ cost of money and what the issuers could earn on their own assets.

Marc Rowan, CEO of Apollo Global Management, the parent of Athene Holding, which has rapidly become a major writer and reinsurer of annuities, described 2022 as the best year in Athene’s history. “This year, I expected to be better, and it has started even stronger,” he told analysts during a call Apollo held to go over its results for the first quarter. “Every metric worked.”

Fixed annuities are now paying rates of about 5%; bank certificates of deposit are paying about 2%. Consumers prefer earning 5% to earning 2%, and “it’s not more complicated than that,” Rowan said.

Kevin Hogan, CEO of Corebridge Financial, said conditions for fixed annuity sales continue to look great to him.

“We have not seen anything to suggest margin compression,” he said. “We continue to see very attractive new business margins.”

But Hogan and Rowan, like other CEOs and chief financial officers at publicly traded annuity issuers, spent much of their companies’ conference calls trying to persuade the analysts that life insurers can outlast the volatility.

What It Means

Top executives at the companies supporting your clients’ life insurance policies and annuity contracts see at least as much fear in the eyes of securities analysts, and the analysts’ clients, as you see in the eyes of many of your clients.

The Fear

Laura Prieskorn, CEO of Jackson Financial, cited an Employee Benefit Research Institute survey data showing a significant drop in the confidence that Americans feel about having enough money to live comfortably in retirement.

Those survey results demonstrate the need for annuities, Prieskorn said.

“Two-thirds of retirees prioritized income generation over maintaining wealth during retirement,” she said.

5 Reasons to Come Out From Under the Bed

Analysts and investors would like to see life insurers continue to generate income, not just to increase product sales.

Here are five types of arguments that life and annuity executives have been making in the past week to give the analysts hope.

1. Life insurance companies are not banks.

Equitable had Robin Raju, its chief financial officer, try to ease fears that life insurers might go through the same kind of implosion that First Republic went through by giving analysts a quick tutorial on how life insurers are different from banks.

Raju emphasized that one big difference is that life insurers have product structures that typically keep customers and assets from running out the door.

“Insurers have more structural protection from severe lapses than bank deposits do,” he said. “And the markets that we operate in have generated consistently stable lapse rates historically.”

In the annuity market, for example, market-value adjustment features penalize clients who take cash out early, and that reduces clients’ incentive to move their money, Raju said.

2. Life insurers can adjust their product mix to make their operations even safer.

Companies like MetLife and Voya Financial have already made major efforts to shift toward selling products like dental insurance and group life insurance that require relatively little capital to support guarantees.

Executives have talked in the past week about continuing efforts to expand sales of “capital light” products.

Mark Pearson, Equitable CEO, emphasized that the company’s registered index-linked annuities, or RILA contracts, fall into the capital light category, because they offer no living benefits.

Ellen Cooper, CEO of Lincoln Financial, talked about that company’s shift toward sales of indexed universal life, which exposes the company to less guarantee risk than term life, and away from term life insurance.

Like Equitable, Lincoln Financial worked to boost sales of RILA products, and its RILA sales increased 9%, year over year.

3. Life insurers have been de-risking their bonds.

Life and annuity issuers hold about $3.6 trillion of their $5.3 trillion in cash and invested assets in bonds, and company executives emphasized that the average credit ratings of their bonds have been rising, not falling.

Chris Neczypor, Lincoln Financial CFO, noted that his company has increased allocation of assets toward higher-end bonds, with ratings of single A or higher, and cut allocations toward bonds toward the lower end of the investment grade category to the lowest level ever.

Ed Spehar, Brighthouse Financial CFO, said that the company moved about $2 billion to higher-rated assets, from lower-rated assets, and reduced the portion of the credit-related investment portfolio with below-investment-grade ratings by about 20%.

4. Life insurers are holding more cash.

Many life and annuity issuers already had high levels of cash because of fears of what the COVID-19 pandemic would do to death claims.

Now that they have weathered the most severe pandemic that modern life insurers have ever faced, they still hold relatively high allocations of cash.

Rowan said the problems in the banking sector caused him to lean on Jim Belardi, Athene CIO, to “massively increase or cash balances.”

Executives emphasized how much cash and highly liquid assets their companies have.

Prieskorn said Jackson has $1.5 billion at the holding company level.

5. The mortgages are good mortgages.

Life insurers have about $1 trillion invested in mortgages and mortgage-backed securities.

Many of the CFOs emphasized that they were giving much more information about the commercial mortgage loan investments and related investments this quarter than in the past, because of keen investor interest in that topic.

Executives at Corebridge, for example, emphasized that they already been moving cash away from lower-end commercial office buildings, toward mortgages on industrial and multifamily housing properties, and that the commercial mortgage investments still in the portfolio are tied to healthy, attractive properties in central business districts.

(Image: seread/Adobe Stock)