Upstream Life fights for annuity business amid ratings slide, Texas order

A small Mississippi life insurer offering the highest annuity rates in the 5-year MYGA market is drawing concerns over its financial condition.

Upstream Life Insurance Co., based in Oxford, Miss., was fined $25,000 by the Texas Department of Insurance in August after regulators concluded that the insurer "misrepresented and filed false and misleading account statements and false quarterly and annual financial statements" with the state.

Upstream "was also operating in a hazardous financial condition," Texas regulators wrote in an Aug. 5 consent order.

AM Best was apparently unaware of those problems when it assigned a Financial Strength Rating of B- (Fair) and a Long-Term Issuer Credit Rating of bb- (Fair) to Upstream on Sept. 9. The rating service abruptly reversed itself last week, downgrading those ratings to C++ and b, respectively.

In response, Upstream requested to "no longer participate" in AM Best's rating process and the ratings were withdrawn.

"The ratings reflect Upstream Life’s balance sheet strength, which AM Best assesses as weak, as well as its marginal operating performance, limited business profile and weak enterprise risk management (ERM)," Am Best wrote in a news release.

The Texas findings "exposed gaps in the corporate governance of the company and contributed to the ERM program being assessed as weak," the release said.

Upstream was started by partners Colby Arceneaux and Derek Hebert in 2018, according to a 2021 Inc. profile. The partners turned Upstream into the No. 3 fastest-growing private company in America that year, Inc. reported. In 2020, the fledgling insurer booked $194 million in revenue.

Upstream is on a strong financial footing, Hebert said on Thursday. The partners declined to provide additional comments.

Strong MYGA rates

Meanwhile, Upstream continues to sell multi-year guaranteed annuities (MYGAs), which is its only product line. The insurer had sales of $35 million through the second quarter, reported Sheryl Moore of Moore Market Intelligence and Wink, Inc.

The number is just a small drop in an $84 billion MYGA market. Like many new companies, Upstream used aggressive rates to attract business. On May 31, Upstream raised rates on its five-year Secure Legacy MYGA to 5.95%. The next-best rate is 5.5% by Heartland National, and most five-year MYGAs pay between 5% and 5.25%

As of Friday, Upstream is still offering its five-year MYGA at 5.95%. But Moore isn't sure what the future take-up will be for a company that isn't submitting itself to independent ratings.

“It is going to be a challenge for Upstream to turn their sales spigot back on, as an unrated insurance company," she said. "I don’t think errors and omissions insurance even covers an agent to write an unrated insurer.”

Texas concerns

The Texas examination of Upstream's financial books focused on a transfer of funds from Financial Shield of America to Upstream as part of a 2021 reorganization designed to make FSOA a subsidiary of Upstream, the consent order states.

TDI regulators say they were shown a quarterly financial statement through Sept. 30, 2021 indicating that Upstream had bolstered its holdings.

"The quarterly statement indicated that FSOA’s assets were in the name of ULIC, which TDI later discovered was false," the consent order says. "Without the false claim of ownership of FSOA’s assets, ULIC had inadequate assets and capital."

Nearly a year later, TDI regulators conducted a comprehensive examination of Upstream's books and found an auditor's report indicating that FSOA's assets were in its own name and not Upstream, the consent order states.

"ULIC represents that despite the assets being in the name of FSOA, the assets remained under the control of ULIC and subject to ULIC’s investment guidelines," the consent order says.

Upstream officers waived their right to a public hearing and other options. Hebert and Arceneaux agreed to resign as officers, per the consent order.

AM Best also downgraded Upstream's credit outlook from stable to negative.

"The negative outlooks reflect the potential impact of organizational changes on Upstream Life’s future operations," AM Best concluded.

Reinsurance in place

On September 2023, Upstream announced a reinsurance agreement to cede "up to $300 million of fixed annuity statutory reserves" to Antarctica Capital, a small investment firm headquartered in New York City.

"The reinsured block may consist of certain durations of the company’s Secure Legacy MYGA statutory reserves over the 2023 and 2024 issue years," a news release states. "The transaction is expected to improve the company’s capital position, including increases to free cash flow and RBC coverage."

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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.