In the end, Ohio National just wasn’t big enough to prevail in the new variable annuity world, one that requires size and scale if VA books are to remain profitable.
After years of shrinking sales, interest rates that are still low and intentional “derisking,” which has dulled the sheen of a once popular product, the VA industry market finally stabilized in the second quarter.
Going forward, VAs face stiff competition from roaring sales of index annuities and any rebound is likely to be muted at best, according to industry analysts.
And the writing is on the wall: Companies with small VA blocks may be better off selling their sputtering VA portfolios and the expensive guarantees attached to them than they are trying to manage them in a shrinking world.
New sales of VAs are fairly concentrated and, outside of the top-10 VA sellers, no company had more than 3.45 percent market share in new VA sales in the second quarter, according to Morningstar.
To understand why companies are leaving the once-torrid VA market, it helps to think of them in terms of capital flows.
Capital flows into and out of VAs like water flowing in an out of a lake behind a dam. Recently, the dam has been releasing greater amounts of water while the lake behind the dam is collecting lower volumes of new water.
“If you don't have enough flow into the products, but you are paying out more, you have negative flows. If you are diversified enough, you can pay policyholders,” explained Deep Banerjee, a director at S&P Global.
“With VAs, companies are not able to sell enough new business so that moves to a negative flow position because there are more claims than deposits,” he said.
In the first half of this year, $42 billion flowed out of VAs putting the annual annuity outflow at about $84 billion, according to Morningstar.
Outflows last year were $71.3 billion, up from $38 billion in 2016.
In-flows in the form of new sales, however, keep dropping.
New sales were $90 billion last year, down from $100 billion in 2016 and $128 billion in 2015, according to Morningstar.
The critical point at which capital flows out of VAs to pay for the contractually promised benefits exceeds capital flowing in from news sales may happen this year, according to year-end extrapolation of first half data.
That’s why VA lines can only survive profitably if the company that holds them gains scale and manages the block more efficiently, which is difficult when interest rates remain at historical lows.
“A company’s size and scale impact its sustainable competitive advantage,” said Bob Garofalo, vice president and senior credit analyst with Moody’s.
With eight- or 10-year deferral periods on VAs now expired or coming to expiration, VA contracts are starting to pay out in higher quantities.
That requires setting aside more capital in reserve at a time when regulators are looking to boost reserving requirements, Banerjee said.
By contrast, index products don’t present insurers with the same challenges.
Index annuities were issued later than VAs and many are still in the deferral period so there’s more money coming in the door in the form of new sales than money going out to pay for the benefits, the analysts said.
Surrender charge periods, which discourage contract holders from turning in the annuity in early, help keep money flowing into the annuity contract.
Ohio National had $186 million in VA sales in the second quarter, down from $250 million in the year-ago period, and down from $220 million in the first quarter, Morningstar reported.
In the second quarter, Ohio National’s share of new VA sales amounted to less than 1 percent, according to Morningstar.
By comparison Jackson National, the top VA seller in the country, captured 18 percent of all new VA sales in the second quarter.
Ohio National only entered the index annuity market last year with its ONdex family.
Ohio National To Maintain Support
About 300 people are expected to be laid off as Ohio National pulls back and instead focuses on its life and disability income business.
“We have reached the limit of annuity business we believe is appropriate for our balance sheet as we go forward,” said Angela Meehan, vice president of corporate marketing for Ohio National, in an email last week.
“With regard to the regulatory landscape for annuity products, we believe it has become substantially more difficult over the past several years,” she wrote.
While Ohio National will no longer sell annuities or retirement plans by the end of the week, the insurer will support all contracts in force through their maturity, including all payments and providing ongoing customer service and support, Meehan said.
Applications must be signed and dated on or before Friday, Sept. 14, she said.
Applications and all other required paperwork must be received at Ohio National in good order by end of business on Friday, Sept. 28. “Additional details have been provided to broker-dealers with sales relationships with Ohio National,” Meehan said in an email.
With Ohio National closing its annuity business, the next step is how soon the block might be put up for sale.
One thing is for sure, there won’t be any shortage of inquiring buyers who want to know.
“Before, you had fewer willing buyers to take that risk and there are more companies in the market today with VA blocks that they want to sell,” Banerjee said.
For example, Voya, which announced it was selling the bulk of its annuity book last December, closed on a deal in June.
Buyers interested in higher-risk, long-dated variable annuities include hedge funds and private equity firms, who see rising interest rates as one reason to buy VA portfolios.
“There’s no shortage of private equity companies looking to buy books of business,” said Tony Compton, vice president of broker-dealer sales with Great American Insurance Group in Cincinnati.
Annuity blocks of business previously shuttered by companies were put up for sale relatively quickly, he said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]