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Portfolio > ETFs > Broad Market

EIA Market Likely to Survive Aviva Exit

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The equity-index annuities market is likely to easily find capacity to replace Aviva if the second largest factor in the equity-index annuity market decides to shrink or change its role in the U.S. insurance marketplace.

Benefitting from the tail winds generated by low interest rates and concerns about the stock market, comments by industry officials and even the data buttress the view that the EIA space is robust given current economic conditions.

The issue is an important issue for the equity-index industry, which has shown steady growth over the past four years.

According to data compiled by Beacon Research, Aviva is the No. 2 player in terms of market share for the EIA market, with $1.2 billion in sales in 2011. Allianz held the top spot, with sales of $1.436 billion in sales in 2011.

Data compiled by LIMRA shows that in 2011 EIA sales were $32.2 billion, and that the top 5 players had 57 percent of the market. According to LIMRA, the top 10 EIA underwriters held 79 percent of the market.

The concern was touched off by a report in the Financial Times says that Aviva is considering the sale of its U.S. unit.

The FT article was based on comments from investment managers at a meeting with Aviva chief executive Andrew Moss during which he reportedly said the company would consider offers for the U.S. division. Analysts have also speculated on the possible disposition of the U.S. unit.

When it was announced April 12, the immediate speculation was that the potential pull out was linked to higher capital standards being eyed by European financial regulators as part of Solvency II.

But Jack Marrion, president of Advantage Compendium, a St. Louis-based research and consulting firm, said that speculation is that external concerns beyond the U.S. is leading to Aviva’s management to shrink the company.

“The U.S. annuity market is or can be made profitable for a carrier,” Marrion said. “So, based on math, I would have to say that the reason for consideration of exiting the U.S. EIA market would have to be based on something else.

Events appear to be confirming Marrion’s view.

That is because on April 19 Aviva announced that its heads of Europe, North America and investment management will step down as it creates two divisions for developed and higher-growth markets. These include Richard Hoskins, CEO of North America.

Peter Eliot, a London-based analyst at Berenberg Bank, explained that while Aviva’s overall strategy “is certainly less clear.” Aviva has been focusing on running its U.K. life insurance operations to generate more cash by writing policies that require less capital backing and offer lower guarantees.

Grouping France, Spain, Italy, the U.S. and Canada with the U.K. may allow the company to replicate this strategy more broadly, Eliot said. “Putting all the developed markets together may focus them on cash generation,” Eliot said. Asia, Poland, Turkey and Russia will provide the company with growth, he said.

But, Marrion said, even if, in the worst-case scenario, Aviva exits the U.S. EIA market, its share is likely to be easily absorbed by the roughly 40 players in the market.

For example, Marrion said that SunLife of Canada in 2004, was No. 4 in sales; by 2006 their sales had dropped by almost a billioin dollars, but over that same time period EquiTrust went from $400 million to more than a billion in sales. “So the slack was taken up,” he said.

And more recently, SunLife and RBC got out of the business, but Securities Benefits and Phoenix came in and more than replaced the lost capacity, Marrion said.

EIA sales are thriving in the current low-interest rate environment.

Marrion said he sees strong growth for EIA sales. “The market will continue to grow in spite of the current low-interest rate environment,’ he said.

“The industry is growing because of low interest rates and concern over stock market volatility, i.e. potential stock market losses,” Marrion said. “That is feeding the fixed-income market.”

Data compiled by LIMRA appears to confirm Marrion’s view.

Over the past few years, indexed annuity sales have been strong, mainly because of the unique economic environment that exists,” said Catherine Theroux, LIMRA spokesperson.

“With persistent volatility in the equity market and historic low interest rates, indexed annuities offer safety of principal, a guaranteed minimum interest rate, and the opportunity to share in market gains, which are attractive to consumers,” she said.

According to LIMRA data, the EIA market has set annual sales records in each of the past two years.

She said that the share of market for the top 3, 5, and 10 companies declined in 2011 from the prior year as a decent portion of the industry’s growth over the past few years has come from smaller to mid-size companies just outside of the top 10.

“Still, a majority of sales come from the top 3 companies,” Theroux said.

According to LIMRA data, the EIA market has grown from $25 billion in 2007 to $32.2 billion in 2011, but the top 10 share of the market has slipped marginally from 81 percent of the market to 79 percent.

Marrion projects that there are perhaps up to 40 players in the EIA market.

She compares the EIA industry with the variable annuity industry.

“The VA market has been carried by the top companies over the past couple of years,” Theroux said.

“These top companies have increased their market share in part by picking up from those exiting the business,” Theroux said.

Another factor contributing to the success of top companies in the VA market is their offering competitive/attractive guaranteed living benefit riders, she said.

“Something interesting to note is that VA sales in 2007 were an all-time high of $184 billion and the top company that year sold about $15.5 billion,” Theroux said.

In 2011 sales were significantly lower than in 2007, but the leading company sold over $28 billion, Theroux noted.


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