(Bloomberg News) Hartford Financial Services Group Inc. Chief Executive Officer Liam McGee may follow Axa SA and Aegon NV's Transamerica in offering to pay customers to exit savings products that are weighing on the company's results.
McGee is under pressure from investors such as billionaire John Paulson to boost the stock, which trades for less than 40 percent of book value. McGee has said he's "laser focused" on reducing risk and that options include lump-sum payments to clients who agree to exit variable annuities guaranteeing minimum returns. The firm already scaled back annuity sales and agreed in April to divest the unit that originates the products.
"Giving out a lump sum right now, it's costly, but it may actually be cheaper than keeping the liability on the books," said Moshe Milevsky, a finance professor at York University in Toronto who studies annuities. "It was the rates that were included in the products that were problematic."
Life insurers are paying the price for guarantees made to clients before 2008, when stock markets were in the midst of a five-year rally and the yield on the 10-year Treasury was more than 4 percent. The industry took on what billionaire Warren Buffett has called an "ungodly" amount of risk and accumulated liabilities as Treasury yields dropped below 2 percent, making it harder to generate returns to cover the obligations.
The deal to sell the origination unit to Forethought Financial Group Inc. excludes the contracts previously issued by Hartford, and McGee's firm had a $3 billion variable annuity reserve at the end of the second quarter. The U.S. annuity business was unprofitable in two of the past four quarters, with a combined loss of $27 million in the 12 months ended June 30.
The insurer is studying whether it can reach agreements with other firms to take on liabilities and assets not covered in the Forethought deal, McGee said Aug. 2. Hartford, based in the Connecticut city of the same name, is weighing client payouts even as consumers may opt to stick with their contracts, McGee said, without disclosing the size of potential incentives.
"We are aggressively looking at that," he said in response to a question about lump-sum payments from Christopher Giovanni, an analyst at Goldman Sachs Group Inc. "That is one of many work streams that we're considering with great urgency and diligence, because we're determined to reduce the book as quickly as we can."
Axa Equitable, a unit of France's largest insurer, plans to offer a payment to clients who cancel their standalone guaranteed death benefit rider on Accumulator contracts issued between 2002 and 2007, said Jo Ann Tizzano, a spokeswoman for the company. Those who accept the offer will receive an increase in their annuity account balance, she said.
Axa Equitable was the No. 1 seller of U.S. variable annuities in 2007, with $16.3 billion, according to data from trade group Limra. The figure fell to $7.1 billion last year.
Industrywide variable annuity sales were $159 billion last year. The figure had spiked to $184 billion in 2007 as insurers competed to win more business, in some cases guaranteeing annual returns of about 7 percent to long-term savers who were willing to accept limits on access to their funds, said Alan Devlin, an analyst at Atlantic Equities LLP.