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Principal to Drop Fixed Annuities and Retail Life, Keep Variable Annuities

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What You Need to Know

  • Low interest rates and new accounting rules have driven many big life insurers to realign their operations.
  • Principal's moves are the product of a strategic review announced in February.
  • The moves involve products backed by $18 billion in reserves.

Principal Financial Group Inc. is joining the list of life insurers that’s trying to minimize its exposure to life insurance and annuity interest rate risk.

The Des Moines, Iowa-based life insurer announced Monday that it to plans to continue to sell individual variable annuities in the United States, but that it plans to end U.S. retail sales of individual fixed annuities and individual retail life insurance.

Principal will continue to sell group life insurance to businesses, and it will continue to sell both individual and group life products aimed at business executives.

The exit from the retail fixed annuity market will include payout annuities and non-variable indexed annuities as well as traditional deferred fixed annuities, Principal said.

Principal generated $122 million in variable annuity sales in the first quarter, according to the Secure Retirement Institute.

Fixed annuity sales figures were not immediately available.

The company has been selling life insurance since 1879.

Principal will “pursue strategic alternatives” for related in-force blocks of individual fixed annuity and individual life insurance business, the company said.

“Strategic alternatives” could involves reinsurance arrangements, sales of blocks of business, or other types of transactions.

The policies and annuity contracts involved are backed by $18 billion in reserves.

Principal noted that the business up for divestiture includes universal life policies that provide secondary benefits guarantees. Those policies are backed by about $7 billion in reserves.

Principal said it will emphasize the sale of U.S. retirement plans; the sale of U.S. employee benefits products, such as dental insurance; and global asset management services.

“The company will continue to support business owners and key executives, allowing for an even sharper focus on the business market,” Principal said.

The company also announced that it has agreed to spend $1.2 billion to buy back its own stock, on top of $675 million in stock repurchase capacity approved in March.

More on this topic

The company now has a “market capitalization,” or total outstanding stock value, of about $17.2 billion.

Elliot Management’s Advice

The changes are the direct result of a strategic review Principal announced in February. Principal began the strategic review at the request of Elliot Investment Management L.P., an activist fund.

An activist fund invests in what it believes to be companies that could increase shareholder returns by making strategic or other changes. The activist fund then tries to persuade the target companies to take its advice.

Elliott argued that Principal could improve returns by following the example of many other major competitors, such as AXA, MetLife, Prudential PLC and Voya,  and eliminating or limiting the scope of retail life and annuity operations.

The other companies have retreated from offering consumers many types of income and benefits guarantees.

Life insurers have traditionally depended heavily on earnings from huge portfolios of bonds, as well as revenue from policyholders’ premium payments, to fund benefits obligations.

In recent years, low interest rates have depressed insurers’ bond yields, and new accounting rules have increased the effects of ordinary ups and downs in bond yields on insurers’ net earnings.

One possible sign that investors may like the new moves is that Principal’s market cap has increased about 18% from where it stood before the strategic review was announced.

The Thinking

Dan Houston, the chairman, president and CEO of Principal, said in a statement that Principal believes the realignment will increase Principal’s focus and help it do well in higher-growth markets, as well as helping it add value for shareholders.

Mark Cicirelli, U.S. head of insurance for Elliott, said the changes should lead to greater capital efficiency at Principal.

“We appreciate the constructive dialogue and the company’s demonstrated commitment to build a less capital-intensive business and to focus on its higher-growth target markets, Cicirelli said.

What It Means

The new deal underscores the reality that providing guaranteed retirement income has become more of a seller’s market. Consumers will need more help from agents and advisors to understand what income guarantee options are still out there.

Pictured: Dan Houston (Photo: Principal Financial)