Hartford pressured to cash out VA holders

Hartford Financial Services Group Inc. chief executive Liam McGee may follow Axa SA and AEGON NV's Transamerica in offering to pay customers to exit savings products that are weighing on the company's results.

He is under pressure from big investors to boost the stock, which trades for less than 40% of book value.

Mr. McGee has said that he is “laser focused” on reducing risk and that options include lump-sum payments to clients who agree to exit variable annuities guaranteeing minimum returns.

Hartford has scaled back annuity sales and agreed in April to divest the unit that originates the products.

“Giving out a lump sum right now, it's costly, but it may actually be cheaper than keeping the liability on the books,” said Moshe Milevsky, a finance professor at York University in Toronto, who studies annuities. “It was the rates that were included in the products that were problematic.”

Life insurers are paying the price for guarantees made to clients before 2008, when stock markets were in the midst of a five-year rally and the yield on the 10-year Treasury was more than 4%.

The industry took on what billionaire Warren E. Buffett has called an “ungodly” amount of risk and accumulated liabilities as Treasury yields dropped below 2%, making it harder to generate returns to cover the obligations.

The deal to sell the origination unit to Forethought Financial Group Inc. excludes the contracts previously issued by Hartford, and Mr. McGee's firm had a $3 billion VA reserve at the end of the second quarter. The U.S. annuity business was unprofitable in two of the past four quarters, with a combined loss of $27 million in the 12-month period ended June 30.

“AGGRESSIVELY LOOKING’

The insurer is studying whether it can reach agreements with other firms to take on liabilities and assets not covered in the Forethought deal, Mr. McGee said Aug. 2.

Hartford has not disclosed the size of potential incentives and is obligated to let clients keep their contracts if they desire.

“We are aggressively looking at that,” Mr. McGee said in response to a question about lump-sum payments from Christopher Giovanni, an analyst at The Goldman Sachs Group Inc. “That is one of many work streams that we're considering with great urgency and diligence, because we're determined to reduce the book as quickly as we can.”

Axa (CS) Equitable, a unit of France's largest insurer, plans to offer a payment to clients who cancel their standalone guaranteed-death-benefit rider on Accumulator contracts issued between 2002 and 2007, spokeswoman Jo Ann Tizzano said.

Those who accept the offer will receive an increase in their annuity account balance, she said.

Axa Equitable was the No. 1 seller of U.S. variable annuities in 2007, with $16.3 billion, according to data from trade group LIMRA. The figure fell to $7.1 billion last year.

METLIFE, PRUDENTIAL

Industrywide VA sales were $159 billion last year.

The figure had spiked to $184 billion in 2007 as insurers competed to win more business, in some cases guaranteeing annual returns of about 7% to long-term savers who were willing to accept limits on access to their funds, said Alan Devlin, an analyst at Atlantic Equities LLP.

Hartford was among the most vulnerable insurers on the guarantees because the company didn't hedge risks as much as MetLife Inc. and Prudential Financial Inc. the largest U.S. life insurers, he said.

Liabilities on the contracts swelled during the financial crisis, helping force Hartford to accept a U.S. bailout and fueling a 60% plunge in the Standard and Poor's 500 Life & Health Insurance Index in the 12-month period ended May 3, 2009.

Related Topics: Hartford Financial Services Group, The Hartford