Earnings season for the first quarter came and went without annuities getting all that much attention.
U.S. life insurers have been talking carefully about their annuity operations for several quarters because of concerns about falling interest rates, tough new accounting rules and COVID-19 social distancing rules on product performance.
Annuity issuers are now moving toward using “mark-to-market” accounting for the derivatives used to stabilize annuities.
A typical big U.S. life insurer might generate a few billion dollars in annuity sales per year, and a few hundred million dollars in net income, in a connection with a book of $20 billion or $30 billion in total annuity obligations.
If it uses derivatives to insure $20 billion in annuity value against stock market volatility, ordinary stock market movement could make the value of the derivatives rise or fall by $2 billion or more.
The life insurer may have to add or subtract that $2 billion from its net results every quarter, putting the net results on a financial rollercoaster.
Securities analysts and life insurance company investors seem to have gotten used to the derivatives-accounting earnings rollercoaster: Most life insurers have done better than, or about as well, as the S&P 500 over the past 30 days, in spite of wild swings in net results.
When life insurance company executives conducted their quarterly earnings calls, the effects of the terrifying COVID-19 surge that swept the country in January on life insurance death claims spurred more conversation.
Some annuity issuers reported that, because of the death benefits they have built into their individual annuities, the increase in mortality did little to reduce individual annuity obligations.
But the effect of the pandemic on mortality did help the performance of the group annuities used to back employer pension plans, and it may have helped the performance of some individual annuities with a relatively low ratio of death benefit obligations to ordinary annuity obligations.
That means some investors could see buying the stocks of life insurers with large group annuity operations, or large blocks of individual annuities with low death benefits, as a way to hedge against the possibility that COVID-19 mortality could be worse than expected for several more quarters.
Increased investor interest in annuity issuers could, in turn, lead publicly traded life insurers to put more time and money into building their annuity operations, by giving them the confidence that it will be easier for them to sell more stock or issue more bonds to investors, if they choose to do so.
For a look at seven other factors shaping the annuity market, see the slideshow above.