Several major insurers post disappointing numbers even while annuity sales soar

The end of the first-quarter reporting period found insurance companies in a precarious position — interest rates continued to rise, generally a positive for insurers, and annuity sales jumped off the page.

Yet several major legacy insurance companies posted uninspiring 1Q results. In fact, some insurers limped to bottom-line losses more common in a sales slump.

Jackson National reported a net income loss of $1.5 billion in the first quarter, and adjusted operating earnings of $271 million were down 28% from the first quarter of 2022. Likewise, Lincoln Financial reported a net income loss of $881 million, compared to a $1.4 billion profit in the year-ago quarter.

Compare those numbers to the first-quarter annuity sales results. Overall annuity sales totaled $94.1 billion, a whopping 49% increase over prior-year results, LIMRA reported.

Analyzing the seeming disconnect between these two data sets requires an understanding of how insurers make money. It doesn’t always correlate directly with sales. It generally comes down to what insurance companies can do with the money they take in from sales.

And those investment decisions have not turned out as well in recent quarters.

“Results are challenged primarily by less favorable fee-based income with lower assets under management and less favorable variable investment income,” said Doug Baker, a director in Fitch Ratings’ U.S. insurance group.

An unsettling combination of economic conditions is not helping insurers make money either.

Markets down

While COVID-19 pandemic fears began to ease in 2022, insurance companies had even bigger issues threatening their investment performance. Rising inflation and geopolitical tensions kept markets volatile and hurt performance.

Insurers had already been chasing gains for several years as interest rates remained near zero. That led to several partnerships between insurance companies and private equity firms. Other old-guard insurers split life insurance and annuity units into separate companies.

American International Group’s life and retirement unit became Corebridge Financial, for example. AIG is several years into a proactive plan to leverage what it does best — global commercial insurance — while isolating the more financially sensitive aspects of its business.

The insurer’s life and retirement plans took shape in 2021, when AIG sold a 9.9% equity stake in the segment to Blackstone for $2.2 billion in an all-cash transaction. A March 2022 deal allows Blackstone to manage up to $60 billion of the global AIG investment portfolio and up to $90 billion of the now-Corebridge investment portfolio.

An initial public offering of Corebridge in September raised $1.68 billion. After the IPO, AIG controlled 78% of Corebridge’s shares, with Blackstone holding about 10%, according to filings.

Like many life/annuity insurers, Corebridge recorded massive sales and small earnings.

First-quarter premiums and deposits of $10.4 billion were up 44% year over year, supported by record sales in fixed annuities and fixed indexed annuities, said chairman and CEO Peter Zaffino. Flows into the general account from individual retirement were approximately $1.3 billion, he added.

However, the unit’s adjusted pretax income of $886 million declined 5% from first-quarter 2022.

The APTI for both the group retirement and life insurance lines decreased 20% to 30%.

The decline was “due to lower alternative investment income and lower fee income, partially offset by higher base portfolio income and improved mortality experience,” AIG said in a news release.

AIG’s diverse portfolio made it easier for the insurer to nimbly execute and remain profitable. Overall, AIG reported a first-quarter profit of $30 million. Earnings, adjusted for nonrecurring costs, came to $1.63 per share, results that exceeded Wall Street expectations.

“Fitch generally views diversification as a positive, as weakness in one line is offset by gains in others,” Baker said. “Throughout the pandemic, the diversification benefit was exhibited with poor mortality results partially offset by longevity benefits.”

A tougher road

Managing the bottom line is proving more difficult for other insurers with less-diverse product lines.

It was an especially tough quarter for Jackson National. Traditionally the leading variable annuity seller, Jackson ended up in a bad spot when VAs posted their worst sales year since 1995.

The sales numbers were not good at Jackson. Total annuity sales of $3.1 billion in the first quarter were down 35% from the year-ago quarter. Variable annuity sales were down 46% compared to the first quarter of 2022.

Jackson stock tumbled about 40% from mid-February to mid-June. Company executives touted future opportunities in the growing retirement planning market during a May earnings call with skeptical analysts.

Scott Romine, president of Jackson National Life Distributors, said the insurer has a diversified product mix and a strong distribution network.

“The hallmark of our success has been the depth and breadth of support we offer our distribution partners,” he said. “It’s meaningful advisor engagement. It’s not just a transactional relationship, but rather we focus on building that mutually beneficial long-term relationship.”

Meanwhile, Lincoln National Corp., parent company to Lincoln Financial, faces a dire situation if bond losses and excess mortality trends go against the company, one analyst said.

Lincoln “has significant exposure to a decline in asset prices over the coming years, as it will soon see retirement payments grow due to the demographic situation,” wrote Harrison Schwartz, a Seeking Alpha analyst.

“Unlike banks, most insurance companies cannot place securities in the ‘held to maturity’ category, where they do not need to realize bond devaluations,” Schwartz explained. “Most insurance company assets are ‘available for sale’ because insurance providers are expected to sell many of their holdings as benefits.”

Lincoln has seen a $10 billion asset devaluation due to declines in the value of its fixed securities assets. Benefit payments surged in 2022, and mortality remains above pre-COVID-19 levels, Lincoln executives have said. The combination of higher mortality and potential bond losses is not good, Schwartz noted.

Product shuffle

Insurers are continuing to cut products and reshape existing product lines to perform better financially. Global Atlantic Financial Group will stop selling new fixed indexed universal life policies, effective July 1.

“During the last several years, sales of our indexed universal life insurance products have been steadily declining, from 16% of total individual markets’ new business production in 2013 to less than 3% today,” said Rob Arena, co-president and head of individual markets. “During that same time, we have continued to drive growth in our annuity and preneed platforms. The decision to focus on these opportunities is the right one for our business today.”

Global Atlantic’s fixed IUL sales dropped sharply in the first quarter, said Sheryl Moore, CEO of Moore Market Intelligence and Wink Inc.

“Frequent feedback from the field left me feeling unsurprised about their exit from the indexed life market,” she added. “The word on the street is that they plan to reenter the indexed life market in 2025, but I would be surprised if they execute on that.”

Most life insurers owned by private equity like to focus on fixed types of annuities, Moore explained. Annuity sales bring in large capital that PE firms can invest to make money, while deferring any payouts until years in the future.

Interest rate traction

Fitch has a neutral outlook on the North American life insurance sector. The rising interest rate environment could provide a financial boost to insurers, Baker said.

In May, the Federal Reserve chose to push its funds borrowing rate by a quarter percentage point — the 10th consecutive boost in rates — as it wrestled with stubborn inflation trends, a falling gross domestic product, a potential U.S. debt default, a likely looming recession and even a surprise banking crisis. The move hiked the rates to a range of 5% to 5.25%, a number unmatched since 2007.

Higher rates help with investment returns and make many insurance products more attractive to consumers, but that isn’t necessarily all good.

“Higher rates should lead to more favorable results for the life industry over the longer term,” Baker said. “However, there are some notable near-term challenges associated with rising rates, including declines in the value of insurers’ fixed-income portfolios, lower assets under management and the potential for policyholder behavior to deviate materially from expectations. Additionally, a severe or prolonged economic downturn would likely pressure the industry.”

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.