Last week, Hartford Life Insurance Co. became the latest carrier to offer a portion of its variable annuity (VA) holders a voluntary buyout. For those owners who accept, all riders, including the lifetime income guarantee, will be voided. In exchange, they can surrender their contract and receive a premium over their current account value.
The move comes not long after Hartford decided to exit the life and variable annuity business to concentrate on property and casualty insurance and other lines of business. Currently, its variable annuity book is in runoff.
“We continue to examine other options to accelerate the runoff of the U.S. and international annuities. With any actions we take, we will continue to honor our obligations to contract holders,” said CEO Liam E. McGee in a conference call last Friday.
According to McGee, the option will be offered to VA holders that collectively account for about 15 percent of the company’s GMWB (guaranteed minimum withdrawal benefits) book in the U.S. in terms of account value, “but more importantly, nearly 45 percent of the U.S. GMWB net amount at risk.”
A spokesperson for Hartford had no estimate regarding how many owners it expects to take the offer.
In recent months, a number of VA providers have made similar proposals. Transamerica offered current holders of several of its VAs with guaranteed lifetime income benefits the option to drop those riders in lieu of an enhanced full cash surrender value. AXA Equitable gave owners of its Accumulator® variable annuity the choice to trade the guaranteed minimum death benefit for a higher account value. And Prudential informed owners of several of its annuities that they can no longer make additional purchase payments as of September 14.
All these moves can be traced back to the ongoing and seemingly never-ending low interest rate environment that makes hedging and paying for those lifetime income guarantees increasingly difficult for carriers.
“The biggest hurdle right now for these carriers is the pricing of these guarantees and that’s based on interest rates and volatility in the marketplace,” said Kevin Loffredi, vice president of annuity solutions at Morningstar. “We’ll see a turnaround if we see rates come back up and the retooling of these guarantees will hopefully be more positive than negative. The insurance companies are trying to be responsible and not offer guarantees they can’t stand behind.
“This may seem like a lot of extra work for investors and their reps but it’s part of the marketplace we’re in and everyone should try to understand that,” Loffredi said.
In light of the structural changes Hartford has undertaken, Loffredi said he wasn’t surprised by the company’s buyout bid. If owners agree to the offer, Hartford can free up dollars now in reserve and bolster its balance sheet, he noted.
An offer they can refuse?
Yet Loffredi conceded the offer is probably not being made in the best interest of the VA investor. “Is it a good deal or not? Most likely it’s not if they are trying to buy someone out of a guarantee,” he said.
However, there may be some policyholders better served by an inflated account value rather than paying an extra fee for a lifetime income rider they might not need. “There are probably a few people it will make sense for,” Loffredi said.
Hartford is not alone in remaking its VA contracts. In the third quarter, Morningstar charted 106 VA product changes, down from 168 in the second quarter but up from 40 in Q3 of last year.
Not all the changes involve cutting back features. New products with what Morningstar termed “attractive living benefits” have been tossed into the marketplace.
That’s because those carriers not weighed down by liabilities already on the books as it relates to living benefits are in a position to create products with more appealing features. “They don’t have that baggage on the books, so they can offer a living benefit at a fairly more attractive rate than the other carriers,” Loffredi said.
There is also a pendulum swing at work in the industry, he added. In an effort to cut back on their risk and exposure, carriers may have scaled back benefits to an extreme. “Then they find they might have gone a bit too far so they come back and offer some provisions that are a bit more attractive than what they used to offer,” Loffredi said.
More companies may follow Prudential’s lead and eliminate add-on payments in attempt to limit their exposure to uncertain future market conditions, Loffredi predicted. But he doesn’t expect a rush of companies taking the buyout route. “Most of these companies that are still in the business still want to offer these guarantees.”
Another reason could be that these buyout offers may taint consumers’ perception of the product class as a whole. “It sends a bad message to the marketplace. It’s like we stand behind it, but we really don’t want to stand behind it,” Loffredi said.