It’s been a momentous couple of weeks for insurance companies and their distributors.
Last month, Wall Street analysts and industry observers were watching to see how first-quarter stock market volatility would affect “equity-sensitive” life and annuity insurance companies and their bottom lines.
Earnings season for life insurers is complete, and now all anyone seemed to be talking about was the effect of new fiduciary rules on life and annuity contracts. This is a development that will affect everyone and anyone in the retirement advice business.
The rule, issued April 6 by the Department of Labor, raises the standard of conduct for carriers and distributors selling financial products and services into retirement accounts. It also alters commission structures.
“The world has changed dramatically for the brokers, insurance agents and to a certain extent the investment advisors,” said Harold Evensky, professor of practice at Texas Tech University and chairman of Evensky & Katz/Foldes Financial Wealth Management.
Nearly every large insurance company CEO mentioned the “conflict of interest” rule during prepared remarks with analysts.
For their part, analysts couldn’t wait to come back to the topic in the question-and answer sessions, even if some company executives preferred to avoid sensitive questions of future fiduciary liability among insurers.
“I’m not going to get into an apportionment of legal liability,” Stephen P. Pelletier, executive vice president and chief operating officer of the U.S. business unit of Prudential Financial, said in response to an analyst.
Tiptoeing Around Liability
Randy Binner of FBR Capital Markets pressed for clarification to the responsibilities between a variable annuity product manufacturer and a respective distributor as signatories to the Best Interest Contract.
Analyst Randy Binner of FBR Capital Markets, pressed for further clarification about what financial institutions – manufacturers or distributors – are responsible in the variable annuity world under the higher regulatory standards referred to as the Best Interest Contract
The distributor is the signatory to the BIC, replied Robert M. Falzon, chief financial officer and executive vice president of Prudential Financial, but “manufacturers will be expected to do certain things and provide types of information to support the distributor in fulfilling those obligations.”
Just what “things” and what obligations rest with the insurance company vis a vis distributors remain to be hammered out, perhaps in guidance issued by Labor Department regulators later this year.
Clearly, though, a tug of war between manufacturers and distributors could prove fertile ground for legal challenges, though many executives chose to avoid tiptoeing into potential legal quagmires.
Parsing through liability will be for the lawyers to decide at another time — and that time will surely come as industry commentators on the changing insurance distribution models light up social media airwaves with expressions of “lawyering up.”
Evensky says the fiduciary rule is the most “impactful event since the deregulation of commissions. This is a humongous change.”
No wonder, then, that in this latest earnings cycle the fiduciary rule has generated so many questions among analysts usually steeped in regular earnings conference fare about profit margins, ratios, capital deployment, segment results, run rates, interest rates and market volatility.
Old Models Out of “Commission”?
High-commission FIAs, a booming segment in an otherwise stagnant annuity sales environment, were the industry’s bright spot last year, but with FIAs joining variable annuities under the higher regulatory standard, analysts ponder how to rework company business models to account for a world of changing commission structures.
“I'm pretty much resigned to the fact it means changes to compensation, but I'm not clear as to what those changes are going to be,” said Doug Warren, a Southern California-based agent with nearly 45 years in the business.
Warren wonders if the changes will equate to a reduction in income, an altered compensation structure, or a different spread of income over several years?
They are questions that industry analysts want answers to as well and were hoping to learn more about in their earnings calls over the past two weeks.
“When I talk to very successful advisors, and what they net after all expenses are paid, you will find high-volume producers not netting much more than 35 percent of gross,” added Warren, author of several books and curator AdvisorGrid.com, of a training website for advisors.
If commission income drops, what parts of an agent’s budget faces the ax: take-home pay, marketing or office staffing, or all three?
But now, back to equity-sensitive insurance and annuity companies selling billions worth of those equity sensitive variable annuities and indexed life and annuity products. How did they fare this quarter? Some big names struggled.
American Equity Investment Life Holding Co., a top seller of fixed and fixed indexed annuities (FIA), reported a first quarter loss of $44.8 million compared with net income of $5.9 million in the year-ago quarter.
At Lincoln National, a top seller of variable annuities, first-quarter net income plunged 33 percent to $201 million compared with the year-ago period.
Prudential Financial, also with a large portfolio of variable annuities, reported first-quarter net income of $1.3 billion compared with $2 billion in the year-ago period.
At MetLife, first-quarter net income rose 3 percent to $2.1 billion, the company said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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