Third quarter lifts insurers' VA businesses

The markets have been kind to investors in variable annuities during the third quarter, which means that they have been even more generous to the insurers that have sold the products in the first place. Equity markets have surged through the year, with the S&P 500 up 28.22% year-to-date. During the third quarter, the index had a healthy gain of 4.7%, rising as high as 1,725.52 on Sept. 18. At the same time, variable annuities, which use subaccounts that invest in equities, captured plenty of that gain, too — even if they've put the brakes on generating new variable annuity sales. “Fee income [from VA business] goes up when markets go up and account values go up,” said Edward Shields, associate director of equity research at Sandler O'Neill and Partners. Life insurers deduct VA and benefit rider fees from the annuity's account value. As a result, the stronger the performance of the annuity's underlying investments, the larger the account will grow and the more fees carriers will be able to reap. MetLife Inc., for instance, generated operating earnings of $422 million from annuities alone in the third quarter, up 47% from a year earlier. Drivers included higher fees from growth in separate accounts, fueled by “strong investment performance,” John C.R. Hele, MetLife chief financial officer, said during the insurer's third-quarter earnings call. At the same time, VA sales at MetLife were down sharply for the third quarter: $2.7 billion, representing a 41% year-over year decline. Prudential Financial Inc.'s individual annuities segment also reported adjusted operating income of $821 million in the third quarter, way up from $207 million a year earlier. Those results include a benefit of $451 million coming from updated profitability estimates, as well as strong market performance over the quarter, among other factors. VA account values, meanwhile, amounted to $147 billion at the end of the third quarter, reflecting an 11% increase from a year earlier and boosted by market appreciation and $4 billion in net flows. Prudential PLC, the United Kingdom-based parent of Jackson National Life Insurance Co., reported that the insurer aims to deliver earnings led by growth in assets under management in separate accounts, which also are known as subaccounts. The insurer's statutory separate account assets were 61.2 billion pounds ($98.6 billion) at the end of the third quarter, up 30% from a year earlier, and its general account assets were 38.8 billion pounds ($62.5 billion), in line with a year earlier. Prudential PLC and Prudential Financial aren't related. Finally, Lincoln National Corp. reported that a combination of strong equity markets and positive net flows — Lincoln has benefited from the biggest insurers' pullback in the VA market — has led to a 15% increase in average account values. At the end of the third quarter, account values hit $109 billion. Although the insurers are rolling in fee income from variable annuities that they have sold, the benefit isn't necessarily trickling down to the distributors that move the products, Mr. Shields said. For instance, MetLife and Prudential have taken steps to moderate VA sales, which means banks and broker-dealers are missing out. “Met and Prudential, once No. 1 and 2 [among VA sellers], are now falling into third, fourth and fifth place,” Mr. Shields said. “That's a significant amount of fee income the banks aren't getting.” Jackson and Lincoln have been absorbing premiums that would otherwise have gone to MetLife and Prudential. At the same time, distributors are looking to other products to help them boost their bottom lines, namely indexed annuities. Jackson and Lincoln manufacture these products, too. “We're in the early stages, but the banks are pivoting toward selling indexed annuities, and that generates fee revenue for them,” Mr. Shields said. “This is new for the banks, and it largely coincides with the targeted sales slowdown in variable annuity business by Met and Pru.”