MetLife Inc., following other major variable annuity providers, plans to trim its VA offerings in an effort to decrease its risk and increase profitability.
The Hartford Financial Services Group Inc., ING Groep NV and Sun Life Financial Inc. are among the insurers that have left the VA business. Others have sought to limit their risk by reducing living benefits, as
MetLife has done, or by adding volatility management strategies, as Lincoln National Corp. did recently.
At an investor event last Wednesday,
MetLife executives said that the insurer is aiming for VA sales of about $18 billion this year, compared with $28.4 billion in sales in 2011.
SALES DRIVER
Driving sales last year was the offer of a living benefit providing 6% growth of the income benefit base and 6% income withdrawals. Last October, in an effort to slow sales, MetLife reduced the benefit to 5%, and in December it filed with the Securities and Exchange Commission to restrict additional contributions to annuities with old riders.
“We will continue to tweak the product, de-risk and improve its profitability in 2012,” William J. Wheeler, president of MetLife's Americas division, told investors at the conference.
MetLife already has started to make these changes.
This month, MetLife stopped selling its C-share VA chassis via third-party distributors. The annuities had no surrender fees; gross dealer concessions total 1% to 2% upfront, plus a 1% trail.
According to broker-dealer executives, MetLife has told them it will drop its L-share variable annuities as of June 11. Meghan Lantier, a company spokeswoman, declined to comment.
“If you're an ardent user of the L share, you have other contracts you can use,” said Ethan Young, an annuity research manager at Commonwealth Financial Network.
He received notice of the upcoming L-share change and noted that there wasn't a lot of push-back from financial advisers.
“In general, the industry will probably look at scaling back L shares; they're expensive for companies to issue,” he said.
Although the four-year surrender period of MetLife's L-share VA chassis is attractive, the product's 4% upfront commission and 1% trail make the earlier liquidity feature more expensive for investors than B shares, which typically have a seven- to eight-year surrender period.
“It makes sense to pull back on L shares; it's a way to reduce sales volumes and the potential risk of churning,” said Tamiko Toland, managing director for retirement income consulting at Strategic Insight. “It makes your book of business less stable when people leave after four years to go to another carrier.”
NOT SURPRISED
Advisers weren't surprised by MetLife's share class developments, given that last year, the insurer pared its living benefit twice and discouraged additional contributions into certain variable annuities with richer living benefits.
But they lamented the fact that the VA playing field is continuing to shrink amid the changes.
“It all leads to the same place: Fewer advisers willing to deal with the changes or talk to clients about the changes,” said Judson Forner, an investment services analyst at ValMark Securities Inc.
“You sell a product, and a year later, if the insurer gets out of the business, the adviser has to address the client's concerns. As a result, we're seeing advisers become less willing to rely on these products,” Mr. Forner said.
“I don't think that [MetLife's] steps are surprising,” said Andrew Murdoch, an adviser with Somerset Wealth Strategies, a firm affiliated with
Raymond James Financial Services Inc.
“It's more important that insurers make the choices to remain profitable and provide for the benefits,” he said.
BETTER PROFILE
Indeed, MetLife's VA business has an attractive risk profile: As of the end of March, the insurer had total VA liability balances of $152.1 billion, with about two-thirds of that tied to a living-benefit rider.
Just 17% of MetLife's guaranteed-minimum-income benefit riders were “in the money” or worth more than the actual account value, Mr. Wheeler said.
MetLife has sold about 375,000 VA contracts — resulting in about $60 billion in sales — over the past three years, but only 250 of those contracts have a living benefit that was in the money as of March 31, Mr. Wheeler said.
Despite the upcoming VA product changes, the insurer has no plans to get out of variable annuities entirely.
“We will manage this business prudently, but I think you can understand why we have no interest in exiting the variable annuities business,” Mr. Wheeler said.
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