Broadcast Retirement Network’s Jeffrey Snyder discusses the impact of the growth of annuity sales on life insurer’s investment strategies with A.M. Best’s Edward Kohlberg.
Jeffrey Snyder, Broadcast Retirement Network
Joining me now, Ed Kohlberg is with A.M. Best. Ed, so great to see you. Thank you for joining us this morning. Of course, Jeff, good to see you.
It’s great to see you as well. Thanks so much. And I think this is an important topic.
We’re going to get into kind of the role of AMBEST as a credit rating agency, but also some of the recent findings as it looked into the life insurance industry. Let me ask you a basic question just so I can level set with the audience. As a credit rating agency, what is the role of AMBEST in its evaluation of life insurance companies or even governments?
Edward Kohlberg, A.M. Best
Yeah, sure. So AMBEST, we’re a credit rating agency global. We focus on the insurance industry, property casualty, life annuity, and health.
I focus on the life and annuity industry. So through our credit rating methodology, we look at the balance sheet strength of organizations, their operating performance, their business profile, and their ERM programs. We have our own, what we call our BCAR, which is our own capital model, which we utilize as part of the balance sheet strength analysis.
So we’ll give companies that we rate a credit rating, and we find it very valuable for the industry to rely on our ratings. And we also do other things such as publications, special reports, as you’re seeing here. And also, we get involved in industry conferences as well.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. I’ve known AMBEST, I don’t know you personally, but I know the organization very well from evaluating lots of different products and services and specifically to the retirement industry. So let’s talk about, I think, Lymra just reported recently that annuity sales, life insurance sales have been up significantly.
That’s great news because people are saving for retirement. They’re thinking about their financial future. But what does that mean when a firm like AMBEST is looking at the underlying company providing that guarantee?
Edward Kohlberg, A.M. Best
Excellent question. Yes, we’re seeing quite a bit of growth in the annuity space as the Lymra market report has shown. Some companies are growing very fast, and we’ve seen a lot of new companies come into the marketplace to come in and participate in that growth.
Some organizations that have been in business a long time has seen that growth as well, mainly in the annuity line of business. So what we look at is we want to make sure that companies that are growing fast, that they have the capital to support that growth. Not only the capital for the current year’s growth, but capital to support their future year’s plan of growth as well.
With that growth, companies are looking to invest in assets that can back the guarantees that they’re putting out for their annuity business. And some of those assets come with additional risks. And within our capital model, we risk charge those assets.
So not only do companies have to support the reserves, but they also have to support the assets that they’re using to back the liabilities as well.
Jeffrey Snyder, Broadcast Retirement Network
So a life insurance company, if you buy a product from them, you pay them a premium, that premium goes to the company, but they have to, if they’re providing some type of guarantee, whether it’s payment today or in the future, they have to keep certain amount of capital on their books. They don’t just keep it in, I’m paraphrasing, you’ll correct me if I’m wrong, but they’ll keep it on the balance sheet. They’ll invest it, perhaps.
We’ll talk about that in a few minutes. And that’s how they’re able to grow their own business, but also backstop these guarantees, these products.
Edward Kohlberg, A.M. Best
Exactly. And that’s how they get their profit as well, by having a spread. And this is mainly for the annuity business.
It’s a very interest-sensitive, spread-based business and capital-intensive as well. So they invest it in an investment and give part of that return as part of the guarantee that they offered when writing that product. And anything over that guarantee is their spread that they’ve earned, that they use to grow their capital, to support future growth.
Jeffrey Snyder, Broadcast Retirement Network
And in terms of, let’s talk a little bit about the investing. And I’m not an investment expert. I play one on TV sometimes or on your phone.
But how typically do these types of products, how does the insurance company invest? Are they investing in traditional equities like the stock market that you and I would invest in within our 401k or individually?
Edward Kohlberg, A.M. Best
No, very good question. So through the life insurance industry, we don’t see a lot of investment in equities. Common stock can be very volatile, right?
And the company wants to make sure that they have liquidity and that they have earnings that they can match against the guarantees that they’re putting out there. So what we see is a lot mainly investing majority in bonds, fixed income securities. There’s corporate bonds, of course.
But what we’re seeing more often is companies look towards private credit, private bonds, which have a higher yield than the public bonds. And of course, there’s been some headlines of concerns in the private credit market with BlackRock and Blue Owl are the two companies that come to mind where there’s been some news and concerns over that. But companies have to be well-versed in the assets that they’re using to back the liabilities.
Private credit is a broad term. I think a lot of the issues that are coming up now are in AI and tech. There’s all sorts of other type of private credit investments that companies are using and not heavily concentrated in that area.
So that’s primarily what we see is fixed income, also mortgage loans. Companies use mortgage loan that they do their own underwriting or utilize other companies underwriting. And one last point there is we’re really seeing a push in investment managers coming into the life insurance space and starting their own or buying a life insurance company to start writing annuities and use their asset allocation acumen to help back those assets.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I can certainly see why it would be attractive if Lymra is seeing the growth of annuity sales in particular growing. I think one of the things we talk about in the retirement industry is retirement income. Those are kind of like annuities, but they’re in the plan.
So a lot of people have come in. Let me ask you in the remaining time, we’ve got about two minutes left, but in the remaining time, if for retirement plan advisors out there or people that are helping, you know, one-on-one working one-on-one, I mean, are there some lessons from the report in terms of the additional due diligence that you should be doing as an advisor for an individual?
Edward Kohlberg, A.M. Best
Yeah, you know, I think for an advisor, really, it’s all about suiting the need of the client and where they are in their life cycle and what their goals are. There certainly are opportunities with annuities, and a lot of the growth annuities are MIGAs, multi-year guarantee annuities, which are, you know, shorter term, right? They’re maybe three, five, seven year, where you can get a better return than maybe a CD, and we’re seeing the banks aren’t really providing longer term guarantees on the CDs.
They’re shorter term that they’re offering. That’s where the MIGA space kind of has come in and provided an opportunity there for those year durations. So that’s where there’s some, you know, opportunity, but it really depends upon the needs and, you know, the goals of the retiree.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, and I should have asked you this last question at the beginning, but I didn’t think about it until the end. Hence, I’m asking you now, but in terms of the change in ratings, what’s the frequency by which you would look at an insurer? Is it monthly, weekly, quarterly, annually?
What’s the typical frequency that someone looking at these ratings would know that they would change?
Edward Kohlberg, A.M. Best
Great question. So it’s constant surveillance. We’re constantly looking at the companies that were assigned in our portfolio.
That being said, we’re required every 12 to 13 months to bring the rating of a company to rating committee to look at it, to either, you know, affirm the rating or change the rating depending upon what the outcome of that rating committee would be. But we’re constantly surveying our companies. If something comes up where an event driven rating is warranted, we will relook at that company, bring it to rating committee and decide upon what the correct rating should be.
Yes.
Jeffrey Snyder, Broadcast Retirement Network
I mean, it’s a fascinating business. And I think a lot of people, before I kind of got into the business, I had no idea that this took place. And we’re going to have to leave it there.
Excellent insight. Thanks so much for joining us. And look, we look forward to having you back on the program again very soon, sir.
Edward Kohlberg, A.M. Best
Of course. Thank you.
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