Strong equity markets may bode well for The Hartford Financial Services Group Inc. and other carriers offering variable annuity buyouts, but the trade-off of giving up significant annuity fees for cutting liabilities may keep some from following suit.
In late January, the former variable annuity juggernaut began sending out offers intended to persuade certain legacy variable annuity clients to walk away from their contracts and living benefits in exchange for a bump in their account value. Customers giving up their Lifetime Income Builder II benefit rider were offered the full contract value on the surrender date or the contract value plus 20% of the payment base, subject to a cap of 90% of the payment base.
At first blush, advisers say the offers appear attractive, with some holders being offered an amount that's at the payment base or near it.
“We never thought they'd get the opportunity to cash out early at full value,” said Paul Mauro, president of Legacy Financial Advisors Inc. Sixteen of his investors have received the offer, and he predicted that half of them — primarily the older ones — will accept.
“For those who are getting the offers, the buyout is favorable for aging clients with health issues,” Mr. Mauro said. “I'm surprised because I'm not used to seeing win-wins [for the client and the insurer].”
Shannon Lapierre, a Hartford spokeswoman, said clients receiving offers that are at or near the amount of their income benefit base could be benefiting from recent strength in the stock market.
"CLOSE TO THE FULL VALUE'
“As markets have rebounded, it's possible some contract holders may be seeing their value approach the living-benefit amount, and because we're waiving the surrender, they get close to the full value,” she said.
Other insurers who've made similar offers, including Axa Equitable Life Insurance Co. and Transamerica Life Insurance Co., as well as others with large blocks of pre-2008 variable annuity business, will be watching for advisers' and clients' reactions to Hartford's offer.
But there's still a big question of whether such deals will become commonplace within the industry. Carriers risk missing out on fee income from legacy annuity blocks as markets rise, and they also could end up burning bridges with their broker-dealer partners and their advisers.
“Hartford is in a particular situation where it makes sense — they are strongly motivated to reduce their block of business,” said Tamiko Toland, managing director for retirement income consulting at Strategic Insight. “But for a company that's gathered the business and wants to keep it on the books for a long time, the impetus is less strong.”
The 2008 financial crisis and the ensuing years of low interest rates have put pressure on carriers that had accumulated large blocks of variable annuity business, especially if those contracts came with living and death benefits. As account values declined amid falling markets, the contracts became more valuable to clients because they had been locked in at market highs. However, it became costly for insurers to hedge against market volatility, and the liabilities tied to the contract became onerous.
Aside from Hartford, other companies that took their lumps amid the crisis due to VA liabilities and hedging woes included John Hancock Financial Services Inc. and ING Groep NV.
But so far, neither has opted to pursue a VA buyout program. ING spokeswoman Maggie Dietrich confirmed that the insurer has decided not to participate in these deals.
Over the last two quarters, analysts have asked management at John Hancock's parent, Manulife Financial Corp., whether the company will weigh a settlement offer. Officials have responded only that they'll look at all options, according to Mario Mendonca, an analyst at Canaccord Genuity, who covers the insurer.
Mr. Mendonca believes that the company won't pursue the buyout option because they would miss out on the fee income from the contracts.
Indeed, as markets rise, so do annuity assets — and the fee income that carriers collect.
“My gut feeling is that they'd lose an ongoing earnings stream, so it might be something they're not open to doing,” Mr. Mendonca said. “The benefit is that you'd get rid of what would be considered a lot of risk. But I don't think the company would be willing to give up the earnings.”
Further, insurers who are still working with broker-dealers run the risk of denting those relationships if they float a buyout offer to clients. Brokers who sold the contract initially aren't thrilled at the prospect of having clients offered a buyout and then question whether the annuity is still appropriate.
“The buyout offer doesn't instill a lot of confidence,” Ms. Toland said. “If you're in the business and still selling, you want people to know it.”
Even with the market boost on settlement offers to clients, advisers very well could keep the offers at arm's length, due to concerns about the suitability of taking the offer, the negative tax implications of taking an outright surrender and the shortage of attractive product alternatives. Taking that short-term account value boost could have a long-lasting impact on retirement planning, and reps would rather avoid that.
“There's a whole slew of things to consider: For instance, if you're on Medicare, taking the cash can affect the cost of your Medicare Part B [premiums],” said William Waldie Jr., president of William Waldie Consulting LLC. “There are all kinds of things to think about.”