(Annuity Market News)
Has Hartford Financial Services Group Inc.’s variable annuity business sprung a leak?
The Connecticut insurer’s fourth-quarter financial report showed an $880 million net outflow from its variable annuities. Net outflows for the entire year were nearly $1.3 billion.
Broker-dealers, according to industry observers, may have been upset because Hartford declined to offer aggressive living benefits that would keep up with other insurers’. The company, which has been the variable annuity sales champion in the bank channel for well over a decade, also had many so-called 1035 exchanges (tax-free exchanges of one annuity for another, which may be another company’s). And high turnover occurred among Hartford’s wholesalers due to a revamped distribution system.
“We are certainly disappointed by our variable annuity outflows in the fourth quarter,” said John Walters, a Hartford Life executive vice president.
Mr. Walters blamed the quarter’s big outflows on factors such as: the competitive environment for living benefits (many of its VA contracts’ surrender charges had expired, prompting 1035 exchanges), seasonal factors like required minimum distributions from IRA accounts in the fourth quarter (40% of Hartford’s variable annuity contracts are held in IRA rollover accounts), and many death benefits paid in the quarter.
The outflows also were at least partly attributable to a revamping of the company’s retirement planning strategy, he said.
The company did not want to compete by offering aggressive living benefits. Mr. Walters said it is taking a conservative approach to risk management, enabling it to obtain reinsurance coverage for its living benefit guarantees — something many other insurers cannot get. Instead of marketing products based solely on guarantees, Hartford is now focusing on customers’ long-term retirement needs.
It has a new team of retirement specialists working with Planco, the company’s wholesaling force. Its focus is mutual funds, retirement, and life and longevity products.
“There was a sales slowdown in 2005,” he said. “More people copied our living benefit offerings. There were 1035 exchanges.”
Several years ago, Hartford’s groundbreaking guaranteed minimum withdrawal benefit propelled sales. Now the company has an aging block of variable annuity contracts that are coming out of their surrender periods. In addition, its Director variable annuity, a single-manager product, had difficulty competing with multimanager offerings.
Mr. Walters said that brokers did 1035 exchanges out of Hartford’s older contracts, moving money into competitors’ variable annuities with more aggressive guaranteed minimum withdrawal benefits. “We lost some producers,” he acknowledged. “We expected that. But we have to build the product right for our risk tolerance and offer value to our customers. We are the lowest-price product on the market.”
Slowing sales and competition may have hurt Hartford in the short term, but the distribution overhaul coupled with two new products should boost sales, Mr. Walters said.
The company’s new “Director M” variable annuity is a multimanager product with just a 195-basis-point mortality and expense charge. Its new “lifetime income builder,” a living benefit that offers a 5% guaranteed annual withdrawal for life, charges just 40 basis points. It has no asset-allocation investment requirements.
“The lifetime income builder is becoming popular,” Mr. Walters said. “It represents just over 20% of all sales since the rider was launched in November of last year.”
Though Hartford is optimistic about sales, obstacles loom. Analysts say that proposed NASD suitability rules could have a negative impact on large carriers’ variable annuity sales.
“It is such a big issue, which could affect the opportunity the industry has to go after people turning over their 401(k) and IRA money,” said Steven Schwartz, an insurance industry analyst at Raymond James Financial Services Inc. “Large variable annuity issuers, like Hartford Life, Lincoln National, and Nationwide Financial Services, could experience less variable annuity sales growth due to the new sales suitability laws.”
