Insurers Are Retooling Annuities

Nov 26, 2008


Investors Will Be Offered Less, but Charged More, for the Popular Investments


The Wall Street Journal


Insurance companies that have eased the minds of many baby boomers with often-costly variable annuities are beginning to retool these retirement products to offer less-generous benefits, possibly at higher costs.

The changes come amid falling markets that can make it harder for insurers to meet the investment guarantees frequently built into these products, which are tax-advantaged mutual-fund-like financial offerings that often promise a minimum return.

Meanwhile, the cost of hedging strategies that insurers adopted in recent years to limit their downside on variable annuities has spiked thanks to market volatility, eating into their profit margins.

Recently, AXA Equitable Life Insurance Co., a unit of French insurance giant AXA SA, announced a “redesign” of its “Accumulator” variable annuity. It used to offer the option of either a 6%-a-year or 6.5%-a-year guaranteed-minimum “income benefit.” It eliminated the 6.5% option and is boosting a fee for the 6% one, up 0.15 percentage point to 0.8% of assets under management per year. (Total fees on guaranteed-minimum annuities often top 3%.)

The U.S. unit of ING Groep NV, a Dutch financial-services firm, is limiting how much new variable-annuity customers can invest in stocks if they want a certain guaranteed income benefit. The company is reviewing other changes to “position our products to reflect the current economic environment,” a spokesman says.

Manulife Financial Corp., the Canadian parent of John Hancock Financial Services Inc., will “look at our product to make it more profitable,” Chief Executive Dominic D’Alessandro told investors in a recent conference call. “We’re going to perhaps adjust our pricing, perhaps adjust the features, perhaps do both.”

Today, “you have to expect that you’re going to get less for the same money or pay more to get the same benefit,” says John Nadel, an insurance analyst at boutique research firm Sterne, Agee & Leach Inc.

Retrenching, even to a small degree, on the generosity of variable annuities represents a reversal for the insurance business. Insurers in recent years have chased the potentially lucrative baby-boomer market by making more elaborate promises to ease the boomers’ concerns of outliving their money in an age when life spans are increasing and traditional pensions are on the decline.

But amid the bear market, insurers’ shareholders have fled the stocks on concerns about the mounting costs of making good on the guarantees, many of which are complex and difficult for consumers and investors alike to decipher. Analysts also are worried about the hedging strategies insurers adopted to protect themselves against the cost of the guarantees.

Milliman Inc., a Chicago consulting firm that advises some insurers on hedging programs, calculates an 80% increase in the hedging cost of a commonly sold, lifetime guaranteed-minimum withdrawal benefit for the 12 months through Oct. 31.

Hartford Financial Services Group Inc. said in an Oct. 29 regulatory filing for the third quarter that its hedge program left the company with a $116 million realized capital loss as the guarantees’ liability outpaced the hedging gains. It cautioned that hedging losses since Sept. 30 had “significantly exceeded those sustained in the third quarter” and “continued equity market volatility could result in material losses in our hedging program.”

Robert Paiano, Hartford’s enterprise chief risk officer, says: “We have already said that we would be looking to retool and reprice our variable annuities. Clearly, the costs associated with the hedging program have increased. However, in the context of the current environment, our hedging program is performing within expectations.” Many insurers, including Hartford, also use reinsurance to reduce exposure from the guarantees.

While product revisions are coming at a furious pace, companies rarely trumpet to consumers that they are offering less or charging more. Financial advisers, through whom many of the sales are made, are often briefed on the changes.

Brian Fenstermaker, a financial planner with Envision Consulting Group LLC in Westerville, Ohio, says he has been busy lately updating a matrix that keeps track of insurers’ various annuity features. For customers seeking a guaranteed, predictable lifetime income stream, “there most likely will be less guaranteed income” than before for a higher price, he said.

Steve Mabry, senior vice president of annuity product development for AXA Equitable, said some elements of the redesigned Accumulator were in the works going back eight months, but the decision to eliminate the 6.5% option and bump up the price of the 6% one was settled on over the past month.

“Looking at the current environment, we feel 6% is good for the client and good for our risk-management process,” he said, adding: “We price our products to be sure they are profitable.”

Insurance analysts say they also expect insurers to eliminate their riskiest fund offerings or offer products that give insurers the ability to raise fees in the future.

If the hedging costs remain as expensive as they are over the next several months, it is likely “insurers would intentionally slow sales of products with certain guarantees, in some cases substantially, because it wouldn’t be economic,” said Scott Robinson, a senior credit officer at Moody’s Investors Service.

Another outcome may be a wave of consolidation, as some companies may decide to refocus energies on other product lines, Fitch Ratings concluded in a recent report.

Write to Leslie Scism at and Liam Pleven at