Insurers still grappling with costly variable-annuity promises

AXA Equitable and Ohio National have recently tried switching consumers out of VAs with rich benefits through buyouts and exchanges

Apr 13, 2018 @ 2:51 pm

By Greg Iacurci

Insurance companies are still trying to wriggle out of promises made years ago to consumers of their variable-annuity products, as certain contract features have proven too generous in light of market conditions such as persistently low interest rates.

AXA Equitable Life Insurance Co. and Ohio National Life Insurance Co. are examples of firms that are doing just that, by offering consumers a buyout or exchange of an annuity purchased around the time of the financial crisis. These involve enticing a consumer to terminate a contract benefit in exchange for some incentive such as a cash lump sum or another product from the insurer.

AXA Equitable Life Insurance Co. is extending a buyout offer, beginning May 1, to investors who purchased the Accumulator Series 04 variable annuity between January and September 2005.

Consumers who terminate their 6% guaranteed minimum income benefit, guaranteed minimum death benefit and Protection Plus benefit (an additional death benefit) would get an increase in their account value, according to a filing.

Ohio National Life Insurance Co. completed a similar exercise within the past month related to several of its ONcore variable-annuity products purchased around 2008-12, according to a filing. Ohio National sought the exchange of variable annuities bought with a GMIB rider for an ONdex fixed indexed annuity with a different type of rider, called a guaranteed lifetime withdrawal benefit.

Such offers are common for "legacy blocks of business" offering rich income benefits like a 6%-7% GMIB, said Jessica Rorar, an investments planner at ValMark Financial Group.

"The carriers want that off the books," Ms. Rorar said.

AXA and Ohio National aren't the only companies to make these offers to consumers — others in recent years include Transamerica Life Insurance Co., Voya Financial and The Hartford Financial Services Group Inc. AXA had previously offered buyouts in 2012, 2013 and 2015.

Most buyouts are sought for contracts with riders issued before or around the financial crisis, said Peter Lamond, variable annuities product director at Wink Inc., a market research firm.

Low interest rates made it difficult for companies to hedge for the risk of the riders, particularly with income benefits continuing to accrue even as contract values declined because of the stock market meltdown, Mr. Lamond said.

"We would receive a financial benefit because past market conditions and the ongoing low interest rate environment make continuing to provide these benefits costly to us," AXA said in its buyout filing. A spokesperson wasn't immediately available to comment.

In addition to contracts with riders that had "rich features," buyouts are typically sought for those contracts that may have allowed "more aggressive investment options and had fee structures that may not have been flexible or large enough," Mr. Lamond said.

Buyouts can take the form of surrendering the contract without a surrender charge or adding additional cash value to an existing or new contract and terminating the rider, for example, he said.

A buyout round has typically occurred among at least one or two carriers every year for the past four to five years, Ms. Rorar said.

Ohio National acknowledges a product exchange could prove more lucrative for the firm than keeping VAs on the books, but says some consumers stand to benefit, too.

"We really feel for some clients this was a wonderful opportunity to enhance their position," said Marty Griffin, senior VP of institutional sales.

However, Scott Witt, owner of Witt Actuarial Services, said "common sense would suggest that all things being equal, you wouldn't want to take a buyout because there's a reason a company wants to get you off the books."

Each case is different and it could ultimately make sense for some clients, he said. For instance, an individual with a family history of longevity may not want to surrender a guaranteed lifetime income feature, whereas someone in poor health or who doesn't expect to live much longer may do well to accept.

"I would caution against trying to come up with a rule of thumb, because health, financial strength of the carrier, appeal of the offer, taxes are things that would need to be considered," Mr. Witt said.

He expects the prevalence of buyouts to decrease over time, since more-recently purchased contracts tend to have less generous features than their older counterparts.

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