Hartford Aims To Reduce Risk By Offering To Buy Out Variable Annuity Clients

[mickeyd]

I don't recall ever reading about a LI company buying back an annuity from an annuitant like this before. Sounds like Hartford (and the others mentioned) may have some serious long term financial trouble it's dealing with. They only refer to VAs in this article, but I wonder if fixed annuities are next.

Hartford Financial Services Group Inc. is offering to pay some clients to give up retirement products as Chief Executive Officer Liam McGee works to reduce risks tied to stock market declines and free up capital.

Holders of some variable annuities, which guarantee payouts, would be offered cash to give up the contracts, McGee said Thursday in an interview. The offer will be made to holders representing 45 percent of the Hartford, Connecticut-based company’s net amount at risk on the contracts, he said.

Hartford is “examining every single possibility we can reasonably consider to accelerate the runoff of the book,” McGee, 58, said on a conference call with analysts. “There’s no stone that’s being left unturned.”

Insurers are scaling back from variable annuities as low interest rates and stock market declines weigh on their profits. MetLife Inc., 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’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 Thursday 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.”

Hartford Aims To Reduce Risk By Offering To Buy Out Variable Annuity Clients

 

[Midpack]

That's interesting to say the least...thanks for highlighting the article.

 

[samclem]

Thanks. Folks who are counting on an annuity to provide a stable monthly check and thereby avoid the volatility of the markets should always be aware that the insurance companies providing these checks are invested in those very same markets. The "stable" checks can only be provided for a limited time if the companies are taking losses.

So, which is the safest bet: Link our fate to that of a single insurance company, or spread the risk over hundreds of companies (bonds or stocks)?
Or, more to the point in this case: If your insurance company offers you a buyout of your annuity because the deal it offered is imperiling its financial future, would it really be prudent to stick with the contract given the situation? Where's that "security" for which I paid a hefty cost?

 

[FinanceDude]

Funny thing is, Hartford hasn't decided how to do this, since most of the contracts involved have a large gap between the contract value and the benefit base that can be drawn from.

We all know insurance companies don't do anything unless its good for them, so I assuming they will offer some lame buyout and count on most people being clueless about it....... if I get any info that is relevant I will post it here.......

 

[pb4uski]

Thanks. Folks who are counting on an annuity to provide a stable monthly check and thereby avoid the volatility of the markets should always be aware that the insurance companies providing these checks are invested in those very same markets. The "stable" checks can only be provided for a limited time if the companies are taking losses.

So, which is the safest bet: Link our fate to that of a single insurance company, or spread the risk over hundreds of companies (bonds or stocks)?
Or, more to the point in this case: If your insurance company offers you a buyout of your annuity because the deal it offered is imperiling its financial future, would it really be prudent to stick with the contract given the situation? Where's that "security" for which I paid a hefty cost?

I saw a similar article a while ago in the WSJ. Hartford and a number of companies underpriced these guarantees and this is one way to try to get out from under them. If I had one of these contracts I would be very skeptical in evaluating any offer especially since it may result in a taxable gain.

However, it is foolish to jump to a conclusion that these contracts are "imperiling its financial situation". It is probably more likely that they are just not earning their targeted return on capital on these products and are attempting to try to optimize a bad situation. In other words, they are probably still making money on these contracts, but not making as much as they would like to and significantly less than they originally expected to.

samclem suggests that it is better to "spread the risk over hundreds of companies (bonds or stocks)" - which is exactly what the insurer does in its investment portfolio which are predominantly bonds with some stocks.

 

[pb4uski]

Funny thing is, Hartford hasn't decided how to do this, since most of the contracts involved have a large gap between the contract value and the benefit base that can be drawn from.

We all know insurance companies don't do anything unless its good for them, so I assuming they will offer some lame buyout and count on most people being clueless about it....... if I get any info that is relevant I will post it here.......

They actually have figured out how to do this in that they made an SEC filing explaining the offer.

See http://www.sec.gov/Archives/edgar/data/925999/000110465912072783/a12-19466_1485apos.txt

 

[pb4uski]

....They only refer to VAs in this article, but I wonder if fixed annuities are next. .....

The offer only applies to VAs. I doubt that we'll ever see anything on fixed annuities - they make good money on those products.

 

[mathjak107]

moishe milevsky had commented a while ago that many of guaranteed income withdrawal benefit annuities were underpriced and may be a great deal.

he couldnt figure out how they offered those deals.

guess he was right as prudential also announced no new money can be added to your account if an existing holder and new new policies will be offered.

http://www.nytimes.com/2012/09/15/y...ributions-annoy-investors.html?pagewanted=all

 

[samclem]

However, it is foolish to jump to a conclusion that these contracts are "imperiling its financial situation".

Well, they sure aren't helping it one bit. Hartford is not a pillar of strength that I'd choose to be the base of my retirement income for the next few decades.

 

[obgyn65]

Wow. I would never have expected that companies would start buying back annuities. Thanks for sharing the article.

I don't recall ever reading about a LI company buying back an annuity from an annuitant like this before. Sounds like Hartford (and the others mentioned) may have some serious long term financial trouble it's dealing with. They only refer to VAs in this article, but I wonder if fixed annuities are next.

Hartford Aims To Reduce Risk By Offering To Buy Out Variable Annuity Clients

 

[pb4uski]

Well, they sure aren't helping it one bit. Hartford is not a pillar of strength that I'd choose to be the base of my retirement income for the next few decades.

The life insurance companies are all rated A (Excellent) by A. M. Best, A- by Fitch and A3 by Moody's and A- by S&P (except HL&A, which is BBB+). I guess they are all fools and you're the wise one.

 

[samclem]

The life insurance companies are all rated A (Excellent) by A. M. Best, A- by Fitch and A3 by Moody's and A- by S&P (except HL&A, which is BBB+). I guess they are all fools and you're the wise one.

Everyone gets to make their own choices. Moody's, S&P, Fitch--well, after their recent fantastic performance at rating the risks of CDOs, I'm sure folks can make their own judgement of the real value of the ratings they pass out. I don't know who is a fool and who is wise. They were rating Enron bonds as "investment grade" 4 days before the company declared bankruptcy, they rated subprime mortgage CDOs "AAA" and we all found out how rotten those were. They make mistakes, especially about systemic risk. I'm just sayin. . .

 

[jayc]

Everyone gets to make their own choices. Moody's, S&P, Fitch--well, after their recent fantastic performance at rating the risks of CDOs, I'm sure folks can make their own judgement of the real value of the ratings they pass out. I don't know who is a fool and who is wise. They were rating Enron bonds as "investment grade" 4 days before the company declared bankruptcy, they rated subprime mortgage CDOs "AAA" and we all found out how rotten those were. They make mistakes, especially about systemic risk. I'm just sayin. . .

+1. Exactly. I think I will go with the facts vs the talking 'suits'.

 

[Midpack]

Everyone gets to make their own choices. Moody's, S&P, Fitch--well, after their recent fantastic performance at rating the risks of CDOs, I'm sure folks can make their own judgement of the real value of the ratings they pass out. I don't know who is a fool and who is wise. They were rating Enron bonds as "investment grade" 4 days before the company declared bankruptcy, they rated subprime mortgage CDOs "AAA" and we all found out how rotten those were. They make mistakes, especially about systemic risk. I'm just sayin. . .

+2, no arguing that point. IMO the big name ratings agencies are still highly suspect based on their role in the 2008 meltdown. I don't think any of us can afford to put all our eggs in one (or even two) baskets no matter how great their "ratings" may seem.

 

[Animorph]

Dang, should have picked up some of those bargin VA's while I could!

 

[brewer12345]

The life insurance companies are all rated A (Excellent) by A. M. Best, A- by Fitch and A3 by Moody's and A- by S&P (except HL&A, which is BBB+). I guess they are all fools and you're the wise one.

I personally won't due business with a company unless they are rated at least Aa3/AA-. These are not high ratings for a life company.

 

[pb4uski]

Agreed that they are not stellar ratings - but at the same time they are not near receivership either as someone was seeming to suggest.

 

[samclem]

I wonder how these companies react if the shoe is on the other foot.

Five years from now: "Hey, Mutual of Nebraska, that annuity contract we agreed on with the 4% interest rate isn't looking so great now to me. Inflation is at 8% and I can get a 10% CD. Can I get my $50K back?"

Sure you can. It's right here on Pg 542 of the contract. Would you like the $14.82 in cash or would you prefer a very nice West Bend toaster instead?

 

[Midpack]

I wonder how these companies react if the shoe is on the other foot.

Five years from now: "Hey, Mutual of Nebraska, that annuity contract we agreed on with the 4% interest rate isn't looking so great now to me. Inflation is at 8% and I can get a 10% CD. Can I get my $50K back?"

Sure you can. It's right here on Pg 542 of the contract. Would you like the $14.82 in cash or would you prefer a very nice West Bend toaster instead?

Hartford is "offering" from what I read. If the shoe was on the other foot, I am sure the annuitant could offer to 'cash out' at a premium...good luck with that huh?

 

[pb4uski]

I wonder how these companies react if the shoe is on the other foot.

Five years from now: "Hey, Mutual of Nebraska, that annuity contract we agreed on with the 4% interest rate isn't looking so great now to me. Inflation is at 8% and I can get a 10% CD. Can I get my $50K back?"

Sure you can. It's right here on Pg 542 of the contract. Would you like the $14.82 in cash or would you prefer a very nice West Bend toaster instead?

What is your point? A policyowner is not compelled to accept the offer. They can say no thanks and Hartford is compelled to perform under the terms of the original VA contract.