Hartford Heads for The Exits In Variable Annuities

The Hartford insurance company is making strategic decisions to exit the annuity business, especially variable annuities.  Industry watchers have long known that variable annuity guarantees made several years ago exceed return expectations, so it’s only a matter of time to see some of these carriers scale back.

Why are they getting out of the annuity business?  two primary reasons- 1) over generous contracts are ‘out of the money’ for the company, and 2) low rates means writing new business is even more risky.

Pervasive low interest rates in the market make it hard to keep pace with the benefits promised.  Insurance companies just like individuals are yield starved, so older contracts promising 7-8-or 9% annual returns are untenable in a 4% rate environment…. and new contracts promising much lower returns may STILL be hard to stay ahead of the game with

What’s it mean? Is Hartford going under? Not likely.  Hartford in particular is under pressure from John Paulson, an activist hedge fund investor, to simplify and streamline its businesses.   And even though they may not be writing new policies and may be trying to buy back variable annuity policies, The Hartford will be in the annuity business servicing existing contracts for many years to come.

My verdict is this: there’s nothing to fear with a Hartford policy if you have one or are consider a secondary market annuity backed by Hartford, even if the company is not writing new business.

If you are considering a new annuity, be extra sure that the credit union checking account quality of the issuing company is as strong as you can find.  This is a tempting marketplace for lower tier companies to grab market share with compelling benefits…. but if low rates prevail for many years, will that B rated company be able to pay out all you are promised today? Don’t make a long term bet on a shady carrier.

Here are two recent articles and a quote on the topic.

http://online.wsj.com/article/SB10001424052970203707604578094753674322148.html#articleTabs%3Darticle and http://www.bloomberg.com/news/2012-11-02/hartford-offers-buyouts-to-annuity-clients-to-trim-risk.html

Hartford Financial Services Group Inc. (HIG) 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 yesterday 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 today. “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. (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.

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