‘Reckless’ Ohio National VA Purge Not A Likely Trend: Analyst

Broker-dealers are dealing with angry producers while unsure themselves how to respond to Ohio National terminating trail commissions on some of its variable annuities.

With Ohio National's Sept. 28 decision to abandon those VA contracts, the company went where other insurers had not dared to go in an effort to shed costly guarantees.

The termination takes effect Dec. 12, and "all individual annuity sales compensation will cease at that time," an Ohio National letter reads.

The decision is believed to be the first of its kind in the industry and affects variable annuity contracts purchased with a guaranteed minimum income benefit rider. The GMIB is appealing to clients looking for guaranteed income in retirement.

Even large, nationwide broker-dealers such as LPL Financial and Valmark Financial Group were caught off-guard by the move.

“We are still trying to figure it out,” said Larry Rybka, president and CEO of Valmark. “Everyone we dealt with at the company is gone and it is hard to get information.”

LPL quickly rushed a memo out to its producers in a bid to calm fears.

“LPL strongly believes this kind of behavior is unprofessional and disrespectful to business partners and clients,” reads the memo, according to a copy obtained by InsuranceNewsNet. “LPL is your advocate. We are actively challenging Ohio National to reverse their decision regarding compensation.”

No further decisions had been reached by the company as of today, an LPL spokesman said.

‘Uninformed’ And ‘Reckless’

At least one industry analyst is sure the Ohio National move will not become a trend.

“Other insurance executives have voiced to me how uninformed or reckless they believed this action to have been,” said Sheryl Moore, president and CEO of Moore Market Intelligence and Wink Inc.

“As a result of this feedback, I do not believe this will establish a precedent in the industry.”

A spokesman for the Ohio Department of Insurance said state regulators there are aware of the Ohio National decision. The department received “a few calls” on the topic since the news came out last week, he added.

“As Ohio National goes through the process of implementing these changes, we will continue to monitor to ensure compliance with Ohio insurance laws,” said Robert Denhard, ODI public information officer, in an email.

Broker-dealers immediately sought to shore up its relationship with other insurers such as Jackson National, Lincoln Financial, Nationwide and others.

“We will make it clear to all of our other annuity partners that the Ohio National decision regarding future compensation is unacceptable,” the LPL memo reads. “We are currently evaluating all annuity sponsor contracts and seeking to identify anything we can legally change or amend in order to protect your commissions in the future.”

Like many insurers, Ohio National is financially hamstrung by the generous guarantees included in those VA contracts sold in years past. Persistently low interest rates turned those policies into a drain on the bottom line.

According to its financial reports, Ohio National has $24.9 billion worth of VA contracts on its books, about 59 percent of its total assets. Earlier this year, the insurer offered clients a VA exchange in an effort to get some of the ONcore VAs with GMIB off its books. The company reportedly found few takers.

Mark Cortazzo, senior partner with Macro Consulting Group in Parsippany, N.J., said his firm has several hundred Ohio National contracts on the books.

“Perhaps Ohio National is unaware of the consequences of these actions,” he said. “Because if they fully understood the impact on the policy holder I would think it would be highly unlikely they would proceed.”

Cutting Their Losses

Nearly every insurer with significant VA product lines at least a decade in existence is in the same boat. Many companies, such as John Hancock, sold off their VA books and got out of the annuity business.

Others entered into reinsurance agreements, or, like MetLife, created a new company to handle troubled life and annuity books. The MetLife spinoff company, Brighthouse Financial, began doing business early in 2017.

Still, no insurer dared go as bold as Ohio National in antagonizing producers. The company responded to the first wave of outrage with a statement reminding brokers they can continue to service clients with all the Ohio National support they currently receive -- just no payment for doing that work.

"If the agent's not getting any commission, what’s his incentive to properly manage the assets?" Moore said. "How are they acting in their clients’ best interest if they’re cutting their agents’ commission? It’s almost as if they’re saying 'We want you to get rid of this business.'”

Many brokers are calling on regulators to weigh in on the Ohio National decision. So far, Finra and Ohio insurance regulators have both indicated little interest in doing so.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

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