2Q Red Ink Flows: Insurers Retrench With Products, Pricing

By John Hilton

More insurers reported second-quarter earnings today and a pattern of strategies is emerging to limit financial losses to ultra-low interest rates and the COVID-19 pandemic.

In addition to pulling products and limiting sales, insurers are aggressively repricing and shifting product lineups. Many are introducing new products in a quick pivot to new strategies.

Lincoln Financial and American Equity held earnings calls today, with executives citing a troubled economy for plunging sales.

"Given the prudence of limiting face to face meetings and increased social distancing to limit the spread of COVID-19, sales pipelines for us and for our industry have slowed," said Anant Bhalla, American Equity CEO. "We are using this time of slower new business activity to identify where we need to retool and modernize our company and to embark on the reinvigoration of our strategic focus."

American Equity

An an industry leader in fixed-indexed annuity sales, American Equity reported a 63% decline in overall annuity sales from the year-ago quarter. The company reported $559 million in annuity sales and a $253 million net loss for the second quarter on $920 million in revenue. The company registered $19 million in net income on $706 million in revenue during the 2019 second quarter.

American Equity is already adjusting on the fly, Bhalla said. In late June, the company launched the Destinations 9 & 10 fixed index annuity, which includes the Destinations index co-developed and co-branded with Bank of America, to the independent agent channel.

"While sales activity may remain subdued until the COVID-19 situation improves or new ways of engaging in new business activity emerge, we believe this and other product refresh plans over the coming few months will lay the groundwork for sustained sales success in 2021," Bhalla added.

In addition, American Equity moved entirely to an employee wholesaler model at Eagle Life for both the bank and broker-dealer channels. Bank sales of annuities have struggled during the pandemic.

"With some new talent hires made and more expected over the coming few months, we expect 2021 to be the first year of meaningful sales growth at Eagle Life and pave the way for it to be as impactful for us in the future as is the independent agent channel today," Bhalla said.

Lincoln Financial

Lincoln Financial is speeding up its shift to variable products as a strategy to beat the downturn, said company President and CEO Dennis Glass.

"The overall product strategy is to continue to reprice products when necessary to achieve our targeted returns, shift our selling emphasis to products achieving good returns, and providing a powerful consumer value and add new products," he told analysts Thursday morning. "In short, our reprice, shift, and add new product strategy."

During the second quarter, fixed annuity sales decreased 77% from 2Q 2019, while variable annuity sales were off just 6%, Lincoln executives said. The Radnor, Pennsylvania-based company reported a $94 million net loss for the second quarter on $3.5 billion in revenue. Overall, Lincoln reported a 17% decline in annuity revenue and an 11% decline in life insurance revenue.

In the year-ago quarter, Lincoln reported $363 million in net income on $4.3 billion in revenue. Glass explained the decision to shift to the VA market.

"Total annuity sales were down as we reduced benefits on VAs with living benefits and deemphasized fixed annuity sales due to lower interest rates," Glass said. "However, we are capturing the asset protection value propositions through our indexed variable annuity, which is more capital efficient and provides better new business returns."

Fixed annuities have been very popular in recent years, but not in the current environment, Glass said.

"Fixed annuities are just simply not an emphasis of ours today in our business model," he said. "We would be investing in the new money range of 2%, and there's just not enough juice in a 2% investment return to provide both a good value proposition for the consumer and a good return on capital for Lincoln."

On the life insurance side, products most affected by price increases include Universal Life, MoneyGuard and variable UL, Glass said, where sales are expected to be down in 2020.

"With changes to these products and as new products developments kick-in, we are confident we will rebuild sales levels achieving strong returns on capital and contribute to future earnings growth," he added.

American Financial Group

At American Financial Group, second-quarter annuity premiums totaled $687 million, a 49% decrease from the year-ago quarter.

"Annuity sales were lower in all channels in the 2020 second quarter as a result of stay-at-home orders and other factors related to the COVID-19 pandemic that significantly impacted our access to distribution partners as well as their access to current and prospective clients," said Craig Lindner, co-CEO.

American Financial's strategy unfolded earlier this year when the company suspended all sales of riders.

At the end of the quarter, only about 12% of AFG's annuity reserves contained these guarantees, Lindner said, which is about half the industry average. That resulted in "lower risk and earnings volatility arising from decreases in interest rates and the stock market."

Overall, American Financial reported total operating revenues of $1.7 billion, a 7.2% decrease year over year.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.