VA Writers Cut Benefits in 2011 to Reduce Exposure

January 03, 2012

By Fran Lysiak
A.M. Best Company, Inc.

Amid 2011's sharply volatile equity markets, some U.S. variable annuity writers have cut policyholder benefits to reduce their own financial exposure or exited the market. Regulatory changes were cited by two Canadian writers, Sun Life Financial and Manulife Financial.

Sun Life cited "unfavorable product economics, which, due to ongoing shifts in capital markets and regulatory requirements, no longer enhance shareholder value" when it shut down sales of variable annuities and individual life insurance in the United States at the end of 2011.

Heightened equity market volatility and low interest rates negatively impacted Sun Life's results reported under the new Canadian version of the International Financial Reporting Standards, especially in its U.S. operations. In the third quarter, Sun Life recorded a loss of C$621 million (US$606 million). Sun Life is exposed to interest rate and equity markets mostly through its insurance and wealth management operations. With year-to-date sales of $2.3 billion, Sun Life ranks 13th in U.S. sales of variable annuities, according to LIMRA and the Insured Retirement Institute/Morningstar.

Under the Canadian mark-to-market accounting regime, the future impact of equity market and interest rate levels measured at the close of the quarter are present valued and reflected in the current period income, A.M. Best said. (Best's News Service, Nov. 28, 2011).

In 2011, Canadian insurers could adopt the Canadian version of IFRS, according to Scott Hawkins, vice president at Conning Research. Under Canadian IFRS, equity market volatility and low interest rates have a greater impact on income statements than under U.S. GAAP, Hawkins said in an email.

"Accounting rule changes play a part of any strategic decision" but it's not the only factor, Hawkins said. For example, the ability to generate sufficient returns, or spreads, on fixed investments to support product pricing is a consideration.

Some variable annuity insurers are reducing guaranteed rates on guaranteed lifetime withdrawal benefit riders while others are developing new indexed annuities to broaden their portfolios, Hawkins said.

The top variable annuity sellers -- MetLife, Prudential Financial and Jackson National -- have reduced their rider benefits recently to slow sales and better manage risk, said Joseph Montminy, assistant vice president for annuity research at LIMRA. Also, asset transfer programs are being used with guaranteed living benefit riders, such as an automatic re-balancing program, to reallocate investments based on fluctuations in the market, Montminy said in an email.

Multinationals have already diversified from variable annuities, or are moving in that direction, Cary Lakenbach, president of Actuarial Strategies Inc., said in an email. The product that guarantees 5% in an environment when long rates are 3% "just does not make sense."

Consumers in many other countries are less risk adverse, and don't need guarantees, so consequently a certain amount of capital "goes much further than in the United States," Lakenbach said.

Canada'sManulife Financial Corp. reported a third-quarter net loss of C$1.27 billion on "substantial declines" in equity markets and interest rates, and took a C$900 million hit associated with hedging the guarantees on its variable annuities (Best's News Service, Nov. 3, 2011). Manulife operates in the United States through its Boston-based John Hancock Financial subsidiary, the 18th largest U.S. variable annuities writer.

"Due to volatile equity markets and the historically low interest rate environment that is expected to continue for an extended period of time, John Hancock is restructuring its annuity business," said Beth McGoldrick, a spokeswoman for John Hancock, in an email. "Going forward, our current annuities will be sold only through a narrow group of key partners."

Canadian regulatory capital requirements are about twice the level of capital held by U.S. companies, Lakenbach said. "Considering hedging costs, the value of the product to the company is low," he said. Between fund fees and rider charges, the customer pays about 400 basis points, Lakenbach said.

Catherine Weatherford, president and chief executive officer of IRI, recently said during an A.M. Best webinar that IRI and Morningstar "are seeing a stabilization of the products." We're "seeing a shift away from tremendous product innovation and development toward distribution."

In December, Netherlands-based ING Groep said it expects to take an estimated $1.2 billion to $1.45 billion earnings charge against fourth-quarter results in its U.S. variable annuity closed block. In early 2011, Genworth Financial said it was exiting variable annuities.

Before the financial crisis of 2008, variable annuity writers were competing intensely to offer better withdrawal benefits for life. But when the markets headed sharply south in the fall of that year, companies had to re-assess their offers, according to Conning. The guarantees of locked-in income were great for policyholders who saw their contract values rapidly decline. But most insurers have scaled back benefits and/or raised fees on new contracts since then.

(By Fran Matso Lysiak, senior associate editor, BestWeek: mailto:[email protected])

Copyright:  (c) 2012 A.M. Best Company, Inc.
Wordcount:  789


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