Allianz is sticking with annuities in the US even as rivals MetLife and Axa retreat. But Europe’s largest insurer may face a bigger challenge from Wall Street firms vying for a slice of the market.
Blackstone Group and Apollo Global Management are among companies that have been betting on fixed annuities, an area where Munich-based Allianz ranked as the top seller last year. The private equity firms are betting they can generate better investment returns on the products, in which customers deposit funds in exchange for a future stream of income.
Rising competition and stricter regulation have reshaped the $222bn market for annuities in the US in recent years. Sales of variable annuities, in which insurers take more market-related risk, declined after some companies scaled back following losses in the financial crisis. In addition to Blackstone and Apollo, firms with ties to Goldman Sachs Group and Guggenheim Partners have also been pushing into fixed annuities.
“The interest shown in the fixed-annuity market by private equity firms basically is a big bet that bond yields will continue to rise,” said Nick Holmes, an analyst at Societe Generale. “It’s interesting to note that private equity firms generally focus on fixed annuities and stay clear of the more risky variable annuities.”
MetLife on Friday spun off Brighthouse Financial, the unit that offers variable annuities to individuals. And France’s Axa, which was the third-largest seller of variable annuities in the first quarter, announced in May a plan to list a minority stake in its US businesses, including the life and savings unit and a holding of about 64% in asset manager AllianceBernstein Holding.
Hartford Financial Services Group, which stopped selling new annuities years ago, is working to exit its remaining block of old contracts.
The variable annuity market in the US is dominated by Jackson National Life, a unit of London-based Prudential. A Newark, New Jersey-based rival with a similar name, Prudential Financial, also offers the products.
Jackson’s high volume of variable sales reflects demand from savers and financial advisers, according to Greg Cicotte, chief distribution officer at the Lansing, Michigan-based company. The company has appropriately guarded against risks of market fluctuations, he said. “Hedging of variable annuities and their guarantees is a serious business,” Cicotte said. “We hedged very successfully through various market cycles including the financial crisis. Turbulent markets are going to happen and we’ve got to make sure that we and our clients are prepared.”
Still, fixed annuities have become more popular, with sales climbing 13% in 2016 from a year earlier, according to industry group Limra. Funds affiliated with Blackstone, the world’s biggest private equity firm, were part of an investor group that agreed in May to buy fixed-annuity provider Fidelity & Guaranty Life.
And Athene Holding, the insurer with ties to Apollo, had an initial public offering last year. It struck a deal last week to take on the risks and profits for fixed annuities sold by Radnor, Pennsylvania-based Lincoln National Corp Dennis Glass, the chief executive officer of Lincoln, said Athene’s location in tax-friendly Bermuda and investing strategy may help make that company’s prospects attractive on the deal. Athene counts on Apollo to help manage its portfolio and bets on assets including credit funds and commercial lending.
The push by new competitors “validates that the marketplace is a good one,” said Todd Hedtke, who oversees more than $100bn for Allianz in the US. “We’ve seen nice growth in the overall marketplace.”
Bill Gaumond, chief financial officer of Allianz Life in North America, highlighted the potential for more predictable returns from fixed products than variable ones. The financial crisis showed how changes in interest rates, stock markets and customer behaviour can lead to higher variable annuity costs. Allianz’s US life business recorded losses in 2008 tied to VA guarantees when stock markets crashed.
In 2011, Axa had to take a 943mn-euro goodwill charge on its US variable annuity book to reflect lower interest rates. Aegon’s Transamerica Corp, a US unit, earlier this year sold closed books of policies including annuities to Canada Pension Plan Investment Board’s Wilton Re Ltd The sale helped the Dutch insurer free up about $700mn of capital this year.
Some companies, including Hartford, and Aegon’s Transamerica have even offered to pay clients to give up variable annuity contracts, helping the insurers free up capital.
Aviva and ING Group are among European insurers that exited US annuity operations. Companies that remained in the industry have dialled back guarantees and charged more for products to help cushion against market volatility.
“While variable annuity providers have changed and repriced their products following losses during the financial crisis, we will have to see whether that is enough to withstand the next market crash,” said Vinit Malhotra, an insurance analyst at Mediobanca.
“Fixed index annuities are simpler compared to variable annuities which feature more guarantee options. There’s always the problem that the hedges underlying these guarantees don’t price customer behaviour correctly.”
The Allianz headquarters is seen in Munich. The largest insurer in Europe may face a bigger challenge from Wall Street firms vying for a slice of the market.
