By Cyril Tuohy
Carriers dialing back on the risk of their variable annuity (VA) contracts are doing so in two ways, experts said. Either they are buying out contract holders or buying back the benefit, or they are asking contract holders to redirect their investments.
Companies like AXA Equitable have elected to buy out some of their contract holders. The strategy is the more generous of the two approaches, and in the case of AXA the carrier is doing so on a “discretionary basis,” said Frank O’Connor, product manager for annuity data for Morningstar.
“They are taking a set block of policies and giving the contract holders a lump sum,” O’Connor said in a telephone interview with InsuranceNewsNet. The lump sum payment removes the stored value from the annuities contract. With other contract holders, AXA is also offering to buy back the death benefits.
The buyout or buyback strategy is widely considered “generous” because the carrier is offering contract holders a choice. “They are being offered it, and it’s not being forced on them,” he said.
Paying a lump sum is cheaper for the carrier than paying for a living guarantee to a contract holder with 20 years left to live, in the present environment with its relatively low interest rates.
Other insurance carriers have offered to move the value of one VA contract to another contract, said Tamiko Toland, managing director of retirement income consulting at Strategic Insight, a mutual fund research and consulting firm.
“Transamerica and AXA are offering exchanges for subscribers to older contracts,” she said. “AXA started with death benefits and is now offering it with guaranteed minimum income benefits (GMIB) and guaranteed living withdrawal benefits (GLWB).”
The trend of offering buyouts or buyback is hardly endemic to carriers with large blocks of guarantee exposure looking to get out of the business and reduce or recast their risk profile. But, in recent years, major companies like John Hancock and ING have suspended sales of new VAs and pared back distribution, O’Connor said.
AXA’s and Transamerica’s approach stand in contrast to the more extreme measures of The Hartford. The Hartford, which sold its life and annuities business in the wake of the Great Recession, is requiring owners of older VAs to move at least 40 percent of their money into bond funds.
Contract holders who fail to move money out of stocks run the risk of losing their guarantees, according to a June article in The Wall Street Journal. The Hartford will begin revoking the guarantees if contract holders don’t reallocate their values by Oct. 4.
“The Hartford, for example, is saying that if you don't reallocate investments in the subaccounts to something more conservative, we are going to terminate the benefit,” O’Connor said. That approach is seen as the more “unfriendly” of the two strategies, he also said.
Carriers want to “bracket” their VA risk, he said. “They are trying to wall that off.”
Why? It’s becoming expensive for carriers to continue paying on the generous VA guarantees that were promised in the pre-2008 era. It was a time that some industry experts recall as a financial nuclear arms race with carriers fighting for accounts by promising guarantees they could not honor.
Before the market collapse, carriers promised guaranteed income of 5 percent, 6 percent and even 7 percent. Insurers were also more permissive about the investment risks they allowed their contract holders.
VA contract holders invested aggressively in the variable portions of their VA contracts, and so long as the stock market was roaring, they delivered on the guarantees.
Life insurers offered 6 percent on a $200,000 account base, for instance, and could handily afford paying $12,000 in a booming market. As account values shrank – to $100,000, for instance – companies were still required to pay $12,000 on an account base worth only half as much.
“You have to pay out 6 percent of the benefit base regardless of the account value, and that’s 12 percent if the account value is $100,000,” O’Connor said.
Post-crisis, contract holders who locked in generous deals a decade ago are happy to hang on to their annuities contracts yielding multiples of what they can get in certificates of deposit or money market funds. As a result, carriers have had to record billions of dollars in charges to quarterly earnings.
Carriers buying out contract holders or ordering customers to shift their assets into more conservative investments are among the strategies that companies use to reduce the risk on billions of dollars of older annuities.
With newer annuity blocks, carriers have raised fees, hiked withdrawal percentages and lowered the age for minimum withdrawal benefits to throttle back on the exposures, O’Connor said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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