Low interest rates are starting to bite in the life assurance sector. Lifetime Income Ltd paid out annuity holders leaving them to fend for themselves, saying it could not meet increased solvency requirements demanded by the Reserve Bank.
Annuities are sold on the premise that you are leaving experts to make your investment decisions; pay a capital sum up front and the insurer will make agreed monthly payments for the rest of your life. It is a gamble. Die earlier than your actuarial-assessed lifespan and the insurer wins; die later and the insurer bears the cost. To cover this risk, life insurers create a liquidity buffer, typically adding a few extra years to every customer’s actuarial lifespan and investing customers’ capital contributions in ultra-safe interest-earning investments.
Lifetime Income’s annuity business was established by Ralph Stewart in 2015. Its customer base was boosted with a 2017 purchase of annuity policies originally issued by Government Life. Lifetime is part of Mr Stewart’s Retirement Income Group.
The High Court was told Retirement Income was broadsided by an August 2020 Reserve Bank edict requiring increased solvency margins; required capital reserves were doubled from five million dollars to ten million. Solvency margins are designed to protect investors, should costs outstrip earnings. Lifetime was Retirement Income Group’s biggest problem. It faced the same problem as annuity providers worldwide; income earned from short-term debt investments plummeted as interest rates fell dramatically after governments poured billions into their economies, responding to the covid-19 pandemic.
The High Court was told Lifetime had some 160 life annuitants. With fixed annual operating costs in excess of $250,000, it could not magic up a further five million in capital. Lobbying Reserve Bank to reduce the increase was unsuccessful. A public capital raise through Forsyth Barr fell over; minimum subscription levels were not achieved. Attempts to sell its annuity customer base failed. The High Court approved a Companies Act scheme of arrangement giving a lump sum payout to each annuitant, cancelling their annuity.
Not all annuitants were happy. One pointed out she would have to find investments paying 9.6 per cent in order to match her former annuity paying to an assumed actuarial age of ninety. Others said that at their advanced age they did not want to be making difficult investment decisions on investment of the capital sum now falling into their laps.
Evidence was given that Lifetime’s average annuitant was aged 89 receiving an annual annuity before cancellation of some $7000. One (aged 89) was receiving $94,300 per year; two others (aged 79 and 81 respectively) were sharing $58,250 annually.
re Lifetime Income Ltd – High Court (20.04.22)
22.075