VA Writers Cut Benefits in 2011 to Reduce Exposure

January 4, 2012 by Fran Matso Lysiak

Amid 2011’s sharply volatile equity markets, some U.S.
variable annuity writers have cut policyholder benefits to reduce their own
financial exposure or exited the market. Regulatory changes were cited by two
Canadian writers, Sun Life Financial
and Manulife Financial.

Sun Life cited
“unfavorable product economics, which, due to ongoing shifts in capital
markets and regulatory requirements, no longer enhance shareholder value”
when it shut down sales of variable annuities and individual life insurance in the
United States at the end of 2011.

Heightened equity market volatility and low interest rates negatively impacted Sun
Life’s results reported under the new Canadian version of the
International Financial Reporting Standards, especially in its U.S. operations.
In the third quarter, Sun Life
recorded a loss of C$621 million (US$606 million).
Sun Life is exposed to
interest rate and equity markets mostly through its insurance and wealth
management operations. With year-to-date sales of $2.3 billion, Sun
Life ranks 13th in U.S. sales of variable annuities, according to LIMRA
and the Insured Retirement Institute/Morningstar.

Under the Canadian mark-to-market accounting regime, the future impact of
equity market and interest rate levels measured at the close of the quarter are
present valued and reflected in the current period income, A.M.
Best said. (Best’s News Service, Nov. 28, 2011).

In 2011, Canadian insurers could adopt the Canadian version of IFRS, according
to Scott Hawkins, vice president at Conning Research.
Under Canadian IFRS, equity market volatility and low interest rates have a
greater impact on income statements than under U.S. GAAP, Hawkins said in an
email.

“Accounting rule changes play a part of any strategic decision” but
it’s not the only factor, Hawkins said. For example, the ability to generate
sufficient returns, or spreads, on fixed investments to support product pricing
is a consideration.

Some variable annuity insurers are reducing guaranteed rates on guaranteed
lifetime withdrawal benefit riders while others are developing new indexed
annuities to broaden their portfolios, Hawkins said.

The top variable annuity sellers — MetLife,
Prudential Financial and Jackson
National — have reduced their rider benefits recently to slow sales and better
manage risk, said Joseph Montminy, assistant vice president
for annuity research at LIMRA. Also, asset transfer programs are being used
with guaranteed living benefit riders, such as an automatic re-balancing
program, to reallocate investments based on fluctuations in the market,
Montminy said in an email.

Multinationals have already diversified from variable annuities, or are moving
in that direction, Cary Lakenbach, president of Actuarial
Strategies Inc., said in an email. The product that guarantees 5% in an
environment when long rates are 3% “just does not make sense.”

Consumers in many other countries are less risk adverse, and don’t need
guarantees, so consequently a certain amount of capital “goes much further
than in the United States,”
Lakenbach said.

Canada’sManulife
Financial Corp. reported a third-quarter net loss of C$1.27 billion
on “substantial declines” in equity markets and interest rates, and
took a C$900 million hit associated with hedging the guarantees
on its variable annuities (Best’s News Service, Nov. 3, 2011).
Manulife operates in the United
States through its Boston-based
John Hancock Financial subsidiary, the 18th largest U.S. variable annuities
writer.

“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,” said Beth
McGoldrick, a spokeswoman for John
Hancock, in an email. “Going forward, our current annuities will
be sold only through a narrow group of key partners.”

Canadian regulatory capital requirements are about twice the level of capital
held by U.S. companies, Lakenbach said. “Considering hedging costs, the
value of the product to the company is low,” he said. Between fund fees
and rider charges, the customer pays about 400 basis points, Lakenbach said.Catherine Weatherford, president and chief executive officer
of IRI, recently said during an A.M.
Best webinar that IRI and Morningstar
“are seeing a stabilization of the products.” We’re “seeing a shift
away from tremendous product innovation and development toward
distribution.”

In December, Netherlands-based
ING Groep said it
expects to take an estimated $1.2 billion to $1.45 billion
earnings charge against fourth-quarter results in its U.S. variable annuity
closed block. In early 2011, Genworth
Financial said it was exiting variable annuities.

Before the financial crisis of 2008, variable annuity writers were competing
intensely to offer better withdrawal benefits for life. But when the markets headed
sharply south in the fall of that year, companies had to re-assess their
offers, according to Conning. The guarantees of locked-in income were great for
policyholders who saw their contract values rapidly decline. But most insurers
have scaled back benefits and/or raised fees on new contracts since then.

(By Fran Matso Lysiak, senior associate
editor, BestWeek: fran.lysiak@ambest.com)

Originally Posted at InsuranceNewsNet on January 3, 2012 by Fran Matso Lysiak.