Genworth Financial Inc.'s decision to leave the variable annuities business could herald more departures by other peripheral players this year.
“There are a number of reasons why companies might throw in the towel — too competitive, too costly, and if I'm a bit player, this is a heck of a time to make up market share when interest rates are so low and volatility is still on the high side,” said Joel Levine, a senior vice president at Moody's Investors Service Inc.
Genworth's decision two weeks ago to end sales of retail and group variable annuities is the latest in a series of pullbacks by insurers throughout the past year.
ING Groep NV started 2010 with the launch of a simplified variable annuity but shut it down Dec. 17, exiting the market as it prepared for an eventual initial public offering of its U.S. insurance operations. Meanwhile,
Ameriprise Financial Inc., which is still in the VA business, has ended third-party distribution of its own product, limiting sales of its VA product to its own advisers.
Analysts pointed to three primary motivators behind insurers' decisions to reduce their presence in the VA business: a tougher fight for market share, a realization that the effort and resources would be better used in a stronger line of business, and an extended low-interest-rate environment.
In the aftermath of the financial crisis, insurers are taking a more tactical look at their businesses and deciding where they ought to concentrate.
“It's reasonable to assume, now that the crisis is behind us, companies can start thinking strategically,” said Rosemarie Mirabella, an analyst with A.M. Best Co. Inc. “It's only natural that they take a critical eye and retool as necessary,” she said. “You'll find companies who will exit and enter various product lines, depending on their balance sheet capacity and comfort with a product.”
Market share due to new sales has gravitated largely toward three major carriers:
Prudential Financial Inc.,
MetLife Inc. and Jackson National Life Insurance Co. Combined, the three held 19.9% of VA market share in assets, excluding fixed accounts, and added up to 40% of total market share in new sales through the first nine months last year, according to data from Morningstar Inc.
BOTTOM 10
By contrast, the bottom 10 companies accounted for less than 1% of total VA market share by assets, according to Morningstar.
Insurers that want to compete successfully against the companies on the leader boards will have to determine whether the expenses are worthwhile.
“If you're large, have many products and distribute through many broker-dealers, and you have significant wholesaler force, then there are a lot of fixed costs there, and there's some sales threshold you have to struggle for in order to be profitable,” said Frank O'Connor, director of insurance solutions at Morningstar. “Statistically, the bottom 10 have been the bottom 10 forever.”
Some of the smaller players have been focusing their efforts elsewhere. For example, Phoenix Life Insurance Co., which ranks 30th among VA sellers in assets, has turned its attention to fixed indexed annuities.
A decline in ratings during the financial crisis made distributors shy away from offering the insurer's variable annuities, which dented sales. Over the first nine months of last year, sales of variable annuities at Phoenix fell to $26.7 million, reflecting an 86% decline from a year earlier, according to Morningstar.
“Fixed indexed annuities are primarily what we're selling these days,” said Phoenix spokeswoman Alice Ericson. “If there are any variable annuity sales out there, it's very minimal.”
"STRATEGIC CALL'
Genworth took a similar tack to Phoenix Life when stepping out of variable annuities to concentrate on business lines that already were successful, such as long-term-care insurance. Among LTC insurance providers, the insurer ranks No. 1, with some $1.9 billion of premiums in force, according to data from LifePlans Inc.
“That's a strategic call as part of Genworth's plan to reorient itself,” said Clark Troy, an analyst with Aite Group LLC.
Interest rates also could play a role in what insurers decide to do with their VA businesses.
“If we stay in a low-interest-rate environment, I wouldn't be surprised to see more carriers pull out of or de-emphasize the issuance of variable annuities,” Mr. Troy said.
Lifetime withdrawal benefits and guaranteed-minimum-income benefits — guarantees that come with VA riders — are sensitive to low interest rates. Insurers that historically haven't hedged much for interest rates and now are looking to do so by buying interest rate swaps are likely paying more for that protection in today's low-interest-rate environment, according to Mr. Levine.
WARNING SIGNS
Although experts were hesitant to bet on which players might exit the VA business this year or pull in the reins on VA sales, they pointed to a series of warning signs: lack of product development, contract closures, limited interaction with or shuttering of distribution channels, and steadily falling sales and market share.
Still, not all VA retrenchments are permanent, and not all warning signs necessarily point to a definite exit, Mr. O'Connor said.
Among the insurers that are looking for an about-face in the VA industry amid a decline in rankings, the loss of a rich VA product and slow sales of a derisked VA, The Hartford Financial Services Group Inc. is expecting to make a 2011 comeback. Further, the insurer is doubling its internal sales force to support field wholesalers and will enhance its VA product — Personal Retirement Manager — in the second quarter.
“If this was last January and I said that the companies with the lowest sales were candidates for exiting, then I'd be looking at companies that haven't exited,” Mr. O'Connor said.
E-mail Darla Mercado at [email protected].
