What Annuity Issuers Are Saying About Cash and Capital Now

What You Need to Know

In the fourth quarter, U.K. government bond market freeze drew attention to access to liquidity.
Analysts have also wondered about the possible downsides of rapidly rising interest rates.
Big, publicly U.S. annuity issuers say they have plenty of cash.

Some of the big U.S. annuity issuers say they’re trying to get higher returns from the capital spend, but they all say they have plenty of cash and capital.

Annuity issuers made a point during recent conference calls with securities analysts of talking about their risk-based capital ratios (RBCs), or capitalization level indicators, and about their ability to find the extra cash to make dividend payments and buy back shares of their own stock.

What It Means

U.S. insurers maintain that they still have plenty of capacity to write new life insurance policies and annuities for your clients, but many insurers would still prefer to limit how much capital they devote to supporting benefits guarantees.

The Backdrop

U.S. life and annuity issuers ended the third quarter of 2022 with $8.6 trillion in total assets, or 6.6% of total U.S. net wealth, according to the Federal Reserve’s Financial Accounts of the United States.

In spite of the huge asset total, some analysts worried that life insurers could run into problems with access to cash and other forms of spendable capital because of forces such as rapidly rising interest rates, changes in accounting rules and geopolitical turmoil. The sudden freeze that locked up the U.K. government bond market in the fall could also be cause for concern.

Lincoln Financial added to the worries when it released its earnings for the third quarter of 2022, and it said it would shift away from products requiring use of large amounts of capital.

But Lincoln Financial emphasized early in February, when it released fourth-quarter earnings, that it’s been doing fine and still has plenty of capital it can use to write the business it wants to write.

Company Perspectives

Here is what major annuity issuers have been saying about their earnings, capital and liquidity, drawn from the companies’ earnings releases, earnings supplement reports and earnings conference calls with securities analysts.

Links to pages where the companies post earnings resources are available here.

American Equity Investment Life

American Equity reported an $18 million net loss for the fourth quarter of 2022 on $654 million in revenue, compared with $82 million in net income on $1.1 billion in revenue for the fourth quarter of 2021.

The company’s results were affected by reinsurance deals, and by changes in asset values that have no immediate effect on its access to cash.

Operating income, which excludes those items, fell to $68 million for the latest quarter, from $91 million for the year-earlier quarter.

Total sales fell to $900 million, from $1 billion in sales in the year-earlier quarter, and sales of non-variable indexed annuities fell to $783 million, from about $982 million, “reflecting the company’s pricing discipline in the midst of historically competitive markets,” the company said.

But sales of non-variable indexed annuities were higher than in the third quarter because “pricing changes made in the fourth quarter helped increase traction with producers,” the company noted.

Axel Andre, the chief financial officer, noted during the company’s earnings call that the company’s year-end estimated risk-based capital ratio increased to 413% of the insurance regulators’ “company action level” at the end of 2022, up from 400% at the end of 2021.

The company has about $650 million more capital than it needs to keep its current ratings from insurance company rating agencies, Andre said.

Anant Bhalla, American Equity’s CEO, said the company has returned $369 million in capital to shareholders in the last five quarters, in the form of dividends and share buybacks, and that it expects to return at least $380 million in capital to shareholders through dividends and buybacks this year.

Bhalla answered an analyst question about the possibility that the National Association of Insurance Commissioners could change the RBC ratio calculation rules. The proposed changes would reduce the value of the assets invested in collateralized loan obligations and private credit funds that could go into the RBC ratios.

The proposed NAIC changes should not have much effect on American Equity, “because we didn’t back up the truck on CLOs and the things like that,” Bhalla said.

“We actually agree with the direction of travel with the NAIC there. And, frankly, would prefer that everyone is super transparent,” he explained. “We are not the firm that backed up the truck on CLOs and structured credit and got cute about it, with respect to all of my competitors who did. So, we feel pretty good about it.”

Brighthouse Financial

Brighthouse reported a $940 million net loss for the latest quarter on $454 million in revenue, compared with $42 million in net income on $2 billion in revenue for the fourth quarter of 2021.

Adjusted earnings, excluding the effects of changes in asset values and other values with no immediate effect on its access to cash, fell to $242 million, from $657 million.

Sales of variable annuities and registered index-linked annuities fell to $1.6 billion, from $2 billion.

Sales of fixed annuities, including non-variable indexed annuities, climbed to $1.7 billion, from $313 million.

Eric Steigerwalt, Brighthouse CEO, said the company’s estimated combined RBC ratio was about 440% at the end of 2022. That was down from 500% a year earlier, but it was toward the high end of the company’s target RBC ratio range of 400% to 450% in normal markets.

The top-level holding company ended 2022 with $1 billion in liquid assets, Steigerwalt said.

Brighthouse returned $488 million in capital to shareholders by buying back stock, and it spent $93 million on buybacks in the fourth quarter of 2022.

Steigerwalt indicated that thoughts about capital will guide the company’s product strategy.

“As we sell the products that we offer today, offer product enhancements and launch new products while continuing to run off our older, less profitable business, we expect our business mix to continue to evolve to a higher-cash-flow generating and less capital-intensive business,” Steigerwalt said.

Corebridge Financial

Corebridge reported a $527 million net loss for the latest quarter on $3.9 billion in revenue, compared with $3.1 billion in net income on $6.8 billion in revenue for the fourth quarter of 2021.

Adjusted pre-tax income, which excludes adjustments on asset values that have no immediate effect on access to cash, fell to $639 million, from $926 million.

First-year premiums and deposits for the individual retirement business, which sells annuities, fell to $2.7 billion, from $3.1 billion.

Corebridge holds the life and retirement business of American International Group. AIG began turning Corebridge into a separate company by selling some of its Corebridge stock to other investors through an initial public offering in September.

Corebridge ended the year with an RBC ratio between 410% to 420%, Kevin Hogan, the Corebridge CEO, said during the company’s earnings call.

Elias Habayeb, Corebridge’s chief financial officer, said the company ended 2022 with $1.5 billion in holding company liquidity and returned a total of $2.2 billion to shareholders last year.

The $1.5 billion in holding company liquidity is enough to meet 12 months of needs, Habayeb said.

Parent company liquidity was down about $500 million from what it was Sept. 30, 2021, because of the timing of debt service and dividend payments, and because of efforts to deal with one-time expenses, such as legal matters, he said.

At an annuity issuer, a block of annuities with interest rate guarantees is spread-based business, and a block of variable annuities, designed in such a way that the holder assumes most of the investment risk, is fee-based business.

Fixed annuities have been more popular than variable annuities in recent quarters, driven by rising crediting rates for fixed products and an increase in investment market volatility.