The Shrinkage in Variable Annuities

Hartford Financial wants to get out of the annuity business. It wants out of the variable annuity business so badly that recently it offered to buy out the interests of current variable annuity holders. This is part of a trend among insurers to limit or withdraw from their annuity businesses.

The problem for insurers is that to stimulate sales during the boom they offered annuities with very attractive features that never contemplated the potential for an environment like that we’ve had. They protected annuity holders against losses to some extent and in some cases guaranteed minimum returns. Policy owners could take maximum risk in their portfolio choices. The policyholders would benefit if the bull market continued, and the insurers would pay if the investments performed poorly. Other moves insurers are making are to limit the number of investment offerings and require annuity holders to have a minimum level of diversification. The days of using variable annuities to seek maximum returns with limited downside risk are ending. The restrictions make variable annuities less attractive, because it is harder to offset their higher costs and the ordinary income taxes that must be paid on distributions.

Insurers are scaling back from variable annuities as low interest rates and stock market declines weigh on their profits. MetLife Inc. (MET), the largest seller of the contracts last year, said Oct. 31 that sales fell by 46 percent in the third quarter as it cut benefits. Axa SA (CS)’s Axa Equitable and Aegon NV’s Transamerica said this year they are offering to pay clients to reduce risks tied to variable-annuity guarantees.

“We are making this offer because high market volatility, declines in the equity markets and the low interest-rate environment make continuing to provide the Lifetime Income Builder II rider costly to us,” Hartford said in a filing yesterday with the U.S. Securities and Exchange Commission. “We would gain a financial benefit because we would no longer incur the cost of maintaining expensive reserves for the guarantees.”