In late July, a sale of The Hartford Financial Services Group Inc.'s variable annuity unit was rumored to be imminent. As September approaches and the deal remains unconfirmed, industry experts point to the challenges involved in selling variable annuity blocks in the current interest rate environment.
Reuters reported July 28 that The Hartford was close to an agreement to sell its runoff annuity unit Talcott Resolution to Atlas Merchant Capital LLC, a private equity firm that former Barclays Plc Chief Executive Bob Diamond co-founded in 2013 to invest in the financial services sector. The price tag was reportedly between $3.0 billion and $3.5 billion.
"If reported terms are true, it's an awfully low price," RBC analyst Mark Dwelle said in an interview. "I don't think anyone will be rushing to sell at 50% of book value."
For much of the past decade companies with significant variable annuity blocks of business were susceptible to market volatility. In a low interest rate environment, a number of these companies were on the hook for the high minimum guarantees promised to customers when rates were high.
The Hartford's U.S. life units had $3.78 billion in variable annuity reserves in 2016, 15th highest among U.S. life groups, according to statutory data compiled by S&P Global Market Intelligence.
It is no secret that these companies have tried to minimize their exposure to the variable annuities market, RBC's Dwelle said.
But according to one analyst, The Hartford's $41 billion variable annuity block has relatively limited risk. "It's not clear whether there are many buyers for [variable annuity] blocks out there, but [The Hartford's] Talcott block would likely be one of the better ones to buy given the pretty low risk characteristics and more limited rate sensitivity within the guarantees," Evercore ISI analyst Thomas Gallagher wrote in a late June report. Even if the company sells at a discount to book value, Gallagher expects the sale would be earnings accretive.
Publicly traded reinsurer Reinsurance Group of America Inc. has expressed a limited interest in variable annuity blocks. "Our appetite for the type of variable annuity blocks that are in the market right now — and it's our experience that those blocks generally have both the higher guarantees or designs and features that make hedging really difficult — those blocks don't fit in with what we look for and they're risks that we're really not comfortable taking," President and CEO Anna Manning said during a July 28 conference call.
Some sources believe it makes sense for a private equity buyer to step up to the plate, although this type of deal may remain scarce.
"While there is logic behind firms selling blocks to private investors given differing investment horizons and strategies, I do not expect the floodgates to open for sellers to seek these types of deals given where we now are in the interest rate cycle and the type of risk transfer afforded in these types of deals," said Jason Langan, eastern region managing partner of M&A transaction services with Deloitte.
And as interest rates rise, companies may be less inclined to sell as margin pressure eases. "Folks are seeing the light at the end of the tunnel in interest yields," Langan said.