The headlines would leave any advisoror consumera bit confused. In the span of several weeks, two large carriers announced their exits from the variable annuity (VA) business and another took a large hit on their earnings due to a previous closure of the product line. Yet at the same time, reports documented a rise in VA sales.
So, what gives? And what impact would those exits have on variable annuity sales in the U.S.? Would these moves change how advisors sell annuities? Would consumers have less choice in annuity products?
First, some background: In December, Sun Life announced it was discontinuing sales of VAs in the U.S. Also in the same month, ING reported a $1.1 billion hit to its fourth-quarter earnings due to a VA block of business it closed in the U.S. back in 2009. In addition, John Hancock said it was “restructuring” its annuity business.
Editor’s Note: Beth McGoldrick, assistant vice president of public relations for John Hancock Financial Services, sent this statement to LifeHealthPro: “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. Going forward, our current annuities will be sold only through a narrow group of key partners such as John Hancock Financial Network. John Hancock will continue its award-winning service to its annuity clients, who will see no change in how their accounts are handled.”
Meanwhile, the Insured Retirement Institute (IRI) reported that net VA sales in the third quarter hit $8.9 billion, a 38 percent rise from the same quarter a year ago and the highest level since 2007.
So why would any carrier turn away from a seemingly lucrative product line?
Much of the turnaround relates to where those carriers are domiciled. ING is based in the Netherlands while John Hancock and Sun Life have Canadian parent companies. As such, those offshore entities operate under different reserve and reporting requirements.
In particular, ING must contend with Europe’s Solvency II requirements, which mandate greater capital reserves, according to Cathy Weatherford, IRI’s president and CEO.
Those new requirements, coupled with market volatility and low interest rates, have forced some companies to rethink their strategies around the VA product, she says.
She does not envision U.S. carriers exiting the business in kind, partly because she maintains the reserve requirements in the U.S. are already equivalent to the Europe’s Solvency II mandates.
“I think each individual carrier makes their own decision based on their own business and distribution models, so I don’t think there is any wholesale answer around this question,” Weatherford says. “But I do believe we are seeing the highest sales since before the meltdown in 2007 this year. So clearly there is available product and advisors and consumers are gravitating toward them.”
What’s more, Weatherford says that carriers are adjusting their product designs to address prevailing market realities.
“We’ve seen significant product retooling over the past three years. We’ve seen significant hedging strategies,” she details. “Many have the ability now to move the money to less volatile fixed incomes if they start seeing market volatility. We know the living benefits aren’t quite as rich as they used to be. They’ve retooled them in a way that they are comfortable with. First and foremost in every insurer’s mind is that they want to be sure they have absolute financial strength so they can perform on the promises they’ve made to policyholders in the products they deliver.”
Which means that consumers and advisors should expect to have a variety of VAs to choose from, Weatherford says.