Beacon Exec: Solvency II May Have Caused Some US Companies to Limit 4Q 2012 Indexed Annuity Sales
March 19, 2013 by Fran Lysiak
OLDWICK, N.J. – Solvency II requirements, increasing reserves and shareholder concerns all put a slight damper on indexed annuity sales, according to the director of sales and marketing at Beacon Research.
Total sales of indexed annuities in the United States were nearly $34 billion in 2012, up about 5% from 2011, according to AnnuitySpecs.com, a firm that tracks the data.
Despite a sales decline of nearly 14% from the fourth quarter of 2011, Allianz Life Insurance Company of North America, a unit of Germany’s Allianz SE, remained the indexed annuity sales leader, with fourth-quarter 2012 sales of $1.23 billion, and a 14.6% market share, according to AnnuitySpecs.com.
Capturing second place was Security Benefit Life Insurance Co., with fourth-quarter sales of $1.02 billion and its sales climbed nearly 157% from the 2011 fourth quarter. Security Benefit Life’s ultimate parent is Guggenheim SBC Holdings. Tracking closely behind Security Benefit at No. 3 was American Equity Investment Life, a unit of American Equity Investment Life Holding Co. (NYSE: AEL), with fourth-quarter 2012 sales of $1.01 billion. However, American Equity’s sales also declined 14.8% from the 2011 fourth quarter. Taking fourth place was Aviva USA, a unit of the U.K.-based Aviva plc, with fourth-quarter 2012 sales of $747.4 million. Aviva’s sales declined sharply — a 39.4% drop — from the fourth quarter of 2011.
Rounding out the top five was Jackson National Life Insurance Co., a unit of the U.K.’s Prudential plc, with fourth-quarter 2012 sales of $487.3 million.
Judith Alexander, director of sales and marketing at Beacon Research, told Best’s News Service the top five in sales of indexed annuities in the fourth quarter of 2011 — Allianz, Aviva, American Equity, as well as Great American and Midland National — all had lower sales in the fourth quarter of 2012 relative to the year-ago quarter. Two — Allianz and Aviva — have European/U.K.-based corporate parents. “Solvency II capital requirements may have motivated them to limit sales,” Alexander said.
All five had to increase reserves due to a new reserve rate issued by the National Association of Insurance Commissioners, she said. “Higher reserves make indexed annuities less profitable.” Each June, the NAIC tells carriers what interest rate they should use to value their reserves, Alexander said. The lower the rate, the more reserves they need to hold, she said.
Also, except Midland, these companies are stock companies with responsibilities to shareholders, Alexander said. In 2012, stock companies generally tried to maintain profitability by reducing certain rates on indexed annuities, reducing premium bonuses, reducing guaranteed lifetime withdrawals rates and reducing commissions, she said. “This had the predictable effect of reducing their sales.”
Total sales of all types of annuities for 2012 declined 8% to $219.4 billion but indexed have been helped by the growing interest by private equity firms, such as Guggenheim and Apollo, which have invested in companies selling these products, according to Limra. Fourth-quarter sales of indexed annuities totaled $8.4 billion, up 2%, according to Annuityspecs.com.
Private equity firms are increasingly tapping into what they view as a potentially lucrative financial opportunity in fixed annuities, including indexed, in the United States (Best’s News Service, Jan. 16, 2013). After Guggenheim Partner’s purchase of Security Benefit Corp. in July 2010, Security Benefit Life was restructured to better align its balance sheet quality and investment portfolio while improving its business profile by implementing new initiatives for marketing, distribution and product strategies (Best’s News Service, Aug. 7, 2012).
Security Benefit Life, a private equity owned company, may have been willing to accept a lower level of profitability for that reason, “or it may have written the business quite profitably due to high-yielding investments,” Alexander said. Jackson National has been “seeking more balance” between variable annuity and fixed and indexed sales, she added.
With uncertainty surrounding Europe’s Solvency II capital adequacy regulatory framework, life insurance companies on both sides of the Atlantic are likely reviewing their more complex products, along with investment portfolios, ahead of the regulatory changes looming on the horizon (Best’s News Service, May 29, 2012). Solvency II is a competitive issue in the United States, in particular in the fixed and indexed annuities market, because this is where the foreign companies are big, Steven Schwartz, an equity analyst with Raymond James, said last year (Best’s News Service, May 29, 2012).
With indexed annuities, an insurer invests most of the customer’s principal in bonds to ensure the policy will generate a small annual return but uses a small portion of the premium to buy options in a stock market index, often the S&P 500. Options that are exercised can result in additional interest credited to a policy, potentially more than an investor might achieve through other fixed-income investments.
Despite “record-low” rates persisting, sales of indexed annuities in 2012 set a record for the fifth consecutive year, according to Sheryl J. Moore, president and chief executive officer of Moore Market Intelligence, the firm that owns AnnuitySpecs.com, in a statement.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
