Reinsuring Living Benefits Could Be A Signal

By Linda Koco
AnnuityNews

With its decision to reinsure new sales of its flagship variable annuity guaranteed living benefit product, Lincoln Financial Group could be sending a signal about its living benefit intentions.

That signal just might spell “capacity,” as in the carrier has the financial wherewithal to stay and compete in the variable annuity living benefits market. Some advisors will certainly read it that way.

Following the well-publicized exits and changes in that market over the past few years, advisors are looking for carriers and products with staying power, and for signs that this power exists in fact as well as in talk. A big reinsurance agreement on a living benefit product that is currently being sold could provide some confidence in that direction.

The fact that the Lincoln is a leading variable annuity seller — it ranked number 2 in new sales in Morningstar’s second quarter sales report — won’t be lost upon advisors either.

Heft

The Lincoln reinsurance deal definitely has heft. Effective in October, the $4 billion agreementprovides for reinsurance of the insurer’s flagship variable annuity living benefit product. (Lincoln terms its flagship line the Lincoln ChoicePlus Assurance Suite.)

The reinsurer, which Bloomberg.net has reported is Wells Fargo’s Union Hamilton Re, will provide 50 percent coinsurance on up to a total of $8 billion of new living benefit guarantee sales through Dec. 31, 2014. Lincoln will retain 100 percent of the product cash flows excluding the living benefit guarantee, the insurer said in its third quarter report.

Deals of that magnitude are relatively rare in the living benefits market. The last big annuity reinsurance deal to make industry headlines was the agreement announced last February for Berkshire Hathaway Life Insurance Company of Nebraska to reinsure Cigna’s s run-off guaranteed minimum death benefits and guaranteed minimum income benefits business. The reinsurer is a business unit of the Berkshire Hathaway, Inc. group, Omaha, Neb.

The Berkshire-Cigna agreement calls for Berkshire to assume 100 percent of Cigna's exposure up to $4 billion of future claims from the run-off business. Cigna is funding the transaction with an incremental $100 million of parent company cash, approximately $1.8 billion of investment assets supporting the run-off businesses, and an estimated $300 million tax benefit associated with the transaction. Cigna president and chief executive officer David M. Cordani said his company took the step “to further reduce risk and continue to improve our financial flexibility.”

The Lincoln reinsurance deal will likely have greater significance to advisors because the reinsurance is backing actively-sold annuity products, not products in run-off.

Reinsurance cycles

Reinsurance news and developments go in cycles. In some eras, reinsurance is seen as a necessity but not something to brag about.

In the life insurance market, where reinsurance is commonly used, some carriers have occasionally touted that they are so financially sound that they don’t need reinsurance for a certain product or business line.

At other times, reinsurance is quite common but not a hot topic.  In the early 2000s, for example, “companies provided a lot of reinsurance and they placed it without much fanfare,” Timothy Paris, chief executive officer of Ruark Insurance Advisors, said in an interview. The Simsbury, Conn., firm is a reinsurance broker as well actuarial consulting firm.  Much of its business is with annuity companies.

“Today, however, there are so few transactions involving annuities and they are harder to do that companies make more news about the deals.”

The news-bearers include the direct carriers that purchase the reinsurance. “The reinsurers can give credibility to the product and how it is supported,” he said.

By comparison, the alternative of selling the product without a living benefit guarantee would not have that confidence-building effect, especially now when demand for living benefit products is higher than supply, he said.

Many carriers have made it clear that supporting living benefit guarantees in the low interest environment has resulted in certain capital constraints. So using reinsurance to support the products may be become something to point out, for companies that have struck such deals.

Might sell more

In theory, reinsuring parts of an active annuity business to an unaffiliated third party should enable producers to sell more annuities of that company, Paris said.

This is because the risk associated with that business has been shifted or shared with the third party. That could enable the carrier to write more business if it wishes.

“Reinsurance is not essential for carriers to have,” he pointed out. “But if only a few companies are selling a certain type of product, producers may wonder if the products will be there for a while.”

When that is the case, a carrier may gain some advantage by bringing an objective third party on board that influences how a product is designed and priced. “The reinsurance lends legitimacy to the product,” Paris explained.

“It puts a halo around the product from a risk management standpoint.”

Something to keep in mind is that reinsurance for variable annuity living benefits is easier to get if the products are the newer “de-risked” designs, developed for sale in today’s low interest rate environment.

“The older vintage products are a lot harder to reinsure because they have richer benefits,” the broker said. “And during difficult economic periods, reinsurance is almost impossible to get. At that point, it gets down to price, with reinsurance only available ‘for the right price.’”

In evaluating the trends, it helps if producers think of living benefit reinsurance as a risk management tool, Paris added. Some carriers will have it and some will not.

Third quarter results

In its third quarter report, Lincoln noted that its variable annuity deposits were up 56 percent for the quarter (to $3.4 billion) from the same period last year, but down 13 percent from second quarter 2013.

Why the sequential decline from Q2 to Q3? It results from “pricing and wholesaler compensation changes and reflects management's actions to limit sales growth involving long-term guarantees,” the company said.

As a result, Lincoln’s third quarter variable annuity deposits without a guaranteed living benefit rider shot up 20 percent from second quarter 2013 while deposits with a living benefit rider fell 16 percent in the same period.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at [email protected].

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