Annuity Carrier Exits: Tsunamis Or Small Waves?
The news that Andrew Moss is resigning from as chief executive of Aviva, Britain’s largest insurer, set off another round of annuity industry jitters.
Those jitters get stirred up every time a major annuity carrier makes a market exit or announces a surprise departure from the top. But are changes of that magnitude cause to worry about future of the industry?
It helps to review the environment. In the case of Aviva, press reports point out that the Moss resignation came in the wake of a “shareholder revolt over executive pay.”
Industry professionals typically view news of resignations like that as corporate stuff, worthy of gossip but not particularly earthshaking where day-to-day work is concerned.
But when this particular story broke, annuity professionals in the United States were still digesting the news that Moss told investors the company would consider selling its U.S. business. The U.S. headquarters for the insurer has not confirmed that the business is for sale, but no matter — people are now buzzing about the prospect anyhow.
Aviva is a big player in the fixed market. LIMRA’s list of top 20 fixed annuity players in 2011 has it in fifth place, based on individual market sales. So developments at the U.S. wing of the British company do make a difference to advisors who sell its products. Hence, the Moss departure has raised some eyebrows.
More eyebrows up
Those eyebrows are joining a lot of other eyebrows that have shot up over exits and moratoriums made by other high profile annuity carriers in recent years.
Just about every annuity professional can recount those exits and changes by heart.
Here a few highlights: ING U.S. stopped selling variable annuities in 2009 and closed that book in 2011 (still sells fixed, indexed and immediate annuities, though); John Hancock scaled back its annuity distribution in November 2011; Sun Life Financial announced in December 2011 that it will exit the U.S. annuity and life insurance market; The Hartford announced in March that it would put its individual annuity book into runoff and look for a buyer of its life insurance business; and, in April, The Hartford announced that Forethought would buy its “individual annuity business capabilities.”
Oh, and then there’s the Genworth Financial news on May 1. The announcement was that Michael D. Fraizer had resigned as chairman of the board and CEO. That’s not a market exit or curtailment, of course. But because it’s another sudden exit of a top executive from a company that ranks among the top 20 on LIMRA’s list of individual fixed annuity carriers for 2011, people notice.
On a smaller scale, other annuity players have trimmed marketing, re-priced products in ways that slow sales, or otherwise reined in sales.
What worries some annuity professionals, especially independent advisors, is concern that their markets might shrink to the point that it compromises their ability to serve clients. Most understand that carriers are responding to deep market forces stemming from the recession of 2008-2009, the prolonged low-interest rate environment, the regulatory uncertainties and related issues. But they are nervous all the same.
Some hope for the best but still worry that the worst is yet to come. Few say, “oh, good.”
Check the statistics
Do those worries have legs? A review of some annuity sales statistics suggests that the ballgame is not over for the industry.
At the recent Retirement Industry Conference in Orlando, LIMRA Assistant Vice President Joseph Montminy presented a chart of individual annuity sales over the past 11 years. In 2011, the sales total came to $240 billion. That’s still off from the 11-year market high of $265 billion in 2008 but it’s above results for both 2009 ($239 billion) and 2010 ($222 billion). That signals the market is coming back.
From 2008 to 2011—the difficult years of Great Recession and its aftershocks—variable annuity sales swooned at first but then bounced back. Meanwhile, fixed annuity sales rose at first but then swooned later on. Here are the numbers:
Worth noting is that variable annuity sales in 2011 surpassed where they were at the start of the recession in 2008 (even though they had not reached or surpassed their 11-year market high of $184 billion in 2007). Not shabby.
As for fixed annuity sales, in 2011, they reached their 11-year high of $111 billion in 2009 but, just two years later, in 2011, they fell to their lowest level since the crash. Even so, 2011 sales of fixed annuities came in higher than their 11-year low of $73 billion in 2007. As expected, given the slowly rising stock market and a prolonged low interest rate environment.
Of course, a review of previous industrywide sales doesn’t mean that individual advisors today will feel no pain from annuity carrier exits and pullbacks. Some are already smarting.
However, industry history suggests that the pain could be short-lived. After all, variable sales typically go up when the stock market rises, and fixed annuity sales typically go up when the market falls — no matter which carriers are in or out of the market. And when those “ups” occur, new products and markets usually emerge in rapid fire succession. Amazingly, that business cycle held even in 2009, when interest rates credited by fixed annuities were falling.
Then again, interest rates kept on falling in 2010 and 2011. That has made business difficult for many if not all annuity carriers, especially those offering the popular living benefit guarantees. And so here we are in 2012 talking about carrier exits and pullbacks.
This suggests that the industry business cycle is no fortune teller; it is more like a guideline that informs without predicting. As relates to this discussion, the business cycle information that seems pertinent here is that annuity business is still in business. Sales, markets, products all change, and even decline, but comebacks can and do occur.
The annuity future
The individual annuity sales results might give some clues as to what the next comeback market might look like.
In the past five years, indexed annuities, which credit interest based on movements of specified indices subject to a minimum guarantee and a cap, set sales records one year after the other. According to LIMRA statistics, the products produced a record $32 billion in sales in each of years 2011 and 2010. They also sold a then-record $30 billion in 2009. And they set records of $27 billion in 2008, and $25 billion in 2007.
In addition, sales for immediate annuities, which pay fixed monthly benefits to annuitants typically in their retirement years, hit a 12-year record high of $8.1 billion in 2011. That’s up from the 12-year-low of $3 billion in 2000, according to a chart that LIMRA’s Montminy showed in his presentation.
Industrywide annuity sales do dwarf those figures, of course. However, annuity company executives are watching the upward trajectories of both product lines as well as the actual sales numbers. Some find it meaningful to see that both indexed and income annuity sales grew throughout the last decade, including the two recessions starting in 2001 and 2008.
Is it any surprise, then, to learn that several new indexed annuities have debuted in the first four months of this year alone? And at least one new income annuity. That’s not a stampede, but it’s a clear sign that carriers are still investing in annuity products where they see opportunity.
Not incidentally, several new guaranteed living benefit products for variable annuities have debuted also, plus some multi-year guaranteed annuities and a few innovations for use with retirement plans.
At the recent Retirement Industry Conference, some conference attendees made the point that carrier exits, moratoriums, and such are not necessarily a sign of annuity industry collapse.
Carriers are always entering and leaving markets, one pointed out. Carriers do that for unique reasons, said another, so it pays to evaluate the reasons before deciding whether to throw in the towel on the industry. And although exits do create temporary voids in the market, other carriers will likely step in to fill the void, said another.
Major carriers are big fish and they do make waves. The question is, are those waves of tsunami proportions or are they just four-footers that splash and vanish? And could some of them even be good for surfing?
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