One of the major elements of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which became law in January, is the provision that facilitates the inclusion of annuities in employer-sponsored retirement plans. What is an annuity? It's a contract between the investor and an insurance company.
How does it work? An individual invests a certain amount of money, and the company pays out income to the investor over an established period of time. Annuities are generally used as a retirement vehicle, with investors electing to receive a steady stream of income over time.
There are generally three types of annuities that investors can choose: fixed, variable, or indexed. A fixed annuity pays out a fixed rate of guaranteed income, while a variable one is tied to the performance of the stock market. An indexed annuity is tied to the performance of an index.
The former regulation said that plan sponsors are not subject to the "safest available annuity" standard, which required a far more rigorous annuity-selection process. The SECURE Act includes a safe harbor for plan sponsors to select annuity providers that are licensed and meet certain other requirements. In other words, it reduces their liability, thus opening the door to offer them in their plans.
The SECURE Act will enable life insurance companies that offer annuities more opportunities to grow their assets. Here are two companies, in particular, that should benefit from the new annuity rules.
1. Lincoln National
Lincoln National (LNC -0.25%) is one of the leading providers of annuities. It had net flows into annuities of $729 million in the fourth quarter and $1.9 billion for the full year -- up from $139 million in outflows the previous year. Annuity income from operations was $269 million in the fourth quarter, up from $258 million in the prior-year quarter. This was primarily driven by net flows and strong equity market performance.
Further, annuity deposits were up 3% in the quarter to $3.9 billion, led by a 10% increase in variable annuity sales. For all of 2019, annuity sales jumped 17% to $14.5 billion over the previous year.
Lincoln had growth in all four quarters last year for both its fixed and variable annuities (VA). But the biggest boost came from its new indexed variable annuity product.
"This year, we expect a further shift to VAs without guarantees as we continue to expand shelf space and new producers. So, another strong quarter and year for the annuities business as growth metrics are clearly benefiting from our broad set of consumer solutions, our multichannel distribution model and consistent market presence," said Lincoln Financial president and CEO Dennis Glass on the fourth-quarter earnings call.
Lincoln is down about 11% year to date, but consensus estimates among analysts call for solid earnings-per-share growth in the next two years.
2. Brighthouse Financial
Brighthouse Financial (BHF 1.41%), based in Charlotte, North Carolina, is another leading annuity and life insurance provider. The company had a strong quarter, at least as far as annuity sales go, with sales up 10% to $1.8 billion compared to the previous year's fourth quarter, and 23% for full-year 2019. Annuity earnings were up 51% quarter over quarter to $265 million.
The company exceeded its goals for annuity deposits last year, said Eric Steigerwalt, president and CEO at Brighthouse in the fourth-quarter earnings release. "We continue to be very pleased with our [annuity] sales as well as the quality of new business we are adding each quarter. Additionally, we are continuing to see excitement from our long-standing distribution partners and remain focused on making our distribution network as broad as possible," Steigerwalt added on the fourth-quarter earnings call.
In February, Brighthouse launched a new SecureAdvantage fixed-index annuity in collaboration with Market Synergy Group, which gives the company access to an exclusive network of marketing organizations. The company has also been executing on a variable annuity hedging strategy to reduce risk and better preserve distributable earnings across various market scenarios and economic conditions. Year to date, the stock is up 6%.
The effects of the SECURE Act provisions as they relate to annuities won't be felt immediately, as it will take time for plan sponsors to add these options. But over the long term, these two companies, in particular, seem well-positioned to continue to gain assets and revenue as annuities become more widely incorporated into 401(k) plans.