MetLife’s decision to sell its career agency insurance channel and broker-dealer to MassMutual Financial Group may signal the contraction of the annuity market that some analysts predicted would come from the Department of Labor’s new fiduciary rule.
The controversial rule changes “the landscape when it comes to commissioned-based sales for variable annuities, mutual funds and real estate investment trusts (REIT),” said John McCarthy, senior product manager for Morningstar in Chicago.
The $300 million deal would transfer all of MetLife’s Premier Client Group — about 4,000 agents — and its affiliated broker-dealer, MetLife Securities, to MassMutual’s captive force of 5,600 agents.
Even before MetLife’s announcement, broker-dealers, asset managers and insurance carriers were busy re-evaluating their business models. The issue is how to approach commission-based sales of variable annuities in the wake of new DOL regulations proposed last year.
Companies are making difficult choices in an annuity segment hobbled by declining sales from a peak of nearly $180 billion in 2007.
Some company executives have talked about shifting variable annuity sales to fee-based advisory platforms. Other carriers began shopping their distribution networks. American International Group, for instance, sold its four separate broker-dealers collectively known as AIG Advisor Group in January.
In the third quarter of 2015, more than 90 percent of all variable annuity sales were commission-based, according to Morningstar data.
Shrinking Profit Margins
Here’s the quandary for variable annuity sellers: Low interest rates have made it difficult for carriers to eke out profits on variable annuities, in particular variable annuities with generous living benefits. New DOL rules will make it more expensive to sell variable annuities, industry executives say.
Companies are “getting hit on their margins from both directions,” McCarthy said. “That’s going to be for all firms.”
Selling its Premier Client Group, MetLife Securities and related assets to MassMutual is expected to save MetLife $100 million this year and $250 million annually thereafter, MetLife said in a securities filing.
MetLife is in an unusual position in that as a systematically important financial institution (SIFI), it needs to hold more capital than the vast majority of other insurers.
MetLife executives, who are challenging that designation in court, have made it no secret that they prefer lower-risk businesses that generate more cash and incur less volatility than variable annuities.
Leaders cringe at the thought of regulators viewing variable annuities as nontraditional insurance products, said Steven A. Kandarian, chairman, president and CEO, in a February conference call with analysts.
With DOL regulators making it more difficult still to sell variable annuities into qualified retirement plans, executives are asking themselves why they should continue selling the products at all.
MetLife’s career agency sale is a signal that carriers are rethinking their entire business, said Kim O’Brien, CEO of Americans for Annuity Protection, a Phoenix-based group that advocates for secure retirement financing through annuities.
In MetLife’s case, the New York-based giant has decided to completely “decouple” the U.S. retail distribution business from the manufacture of annuities. That has automatically shielded MetLife by placing it in a “more protected space” with regard to the DOL rule, O’Brien said.
Will other companies with large career agency sales forces like Northwestern Mutual or New York Life follow suit?
Getting out of retail distribution makes economic sense for MetLife, particularly since the Premier Client Group contributed “modest profits” on revenue of between $500 million and $1 billion a year. The upshot for agents and consumers is there will be one less U.S. proprietary retail channel through which to sell fixed annuities when the deal goes through later this year.
Warnings May Come True
Fewer retail outlets is exactly what the annuity industry had warned regulators of all along since the DOL introduced its rule in April 2015.
“MassMutual is picking up 4,000 advisors, but will they pick all of them up to sell into the fixed annuity market?” O’Brien asked. “They may pick up the advisor group from MetLife, but are they picking up annuity sales advisors is the question.”
Nearly 70 percent of all nonindexed annuities sold in 2014 were sold through captive distribution channels made up of career agencies, banks and wirehouses, LIMRA data indicated. One less captive agency channel means less choice for those seven out of 10 fixed annuities sold through proprietary distribution networks.
“We think this is so harmful and the MetLife-MassMutual action demonstrates the harm, which is that proprietary distribution of (fixed annuity) product will limit access to consumers interested in annuities,” O’Brien said. “There’s not a MassMutual agent on every street corner around the country.”
MetLife will likely continue to manufacture variable annuities in the near term, as the company still sold $5.2 billion worth of variable annuities in the third quarter of 2015, according to LIMRA Secure Retirement Institute data.
The company also maintains a robust independent advisor sales channel to sell into a market that still generated $135.8 billion in new variable annuity sales in 2014.
With the acquisition of Premier Client Group, it’s up to MassMutual to figure out how to apply economies of scale to a bigger retail distribution channel while maintaining variable annuity markets in the new fiduciary world, McCarthy said.
Should MassMutual decide to merge MetLife Securities with MML Investors Services, MassMutual’s broker-dealer and registered investment advisor, the Massachusetts-based carrier will simply own a larger broker-dealer and claw its way up the variable annuity league tables.
MassMutual ranked 20th, with variable annuity sales of $779.3 million in the third quarter of 2015, LIMRA SRI reported.
Fixed Index Annuities to Benefit
In contrast to fixed annuities, with nearly 70 percent being sold through captive distributors in 2014, nearly 80 percent of fixed index annuities (FIAs) were sold through the independent channel that year. FIAs have quickly become the industry’s new “it” product that protects investors from loss but allows them to participate in market gains.
Any new FIA backed by the strength of MetLife and distributed by a blue-chip company like MassMutual can only be good for buyers and an annuity market segment in the midst of a boom, according to Sheryl J. Moore, president and CEO of Moore Market Intelligence, a market-leading annuity research company.
FIA sales hit $54.5 billion last year, an increase of 13 percent compared to 2014, according to LIMRA data. The increase outpaced all fixed annuity sales, which rose 7 percent in 2015 compared to 2014, LIMRA data show.
Separate data published by Wink’s Sales & Market report show 2014 indexed annuity sales reached $46.8 billion, an increase of 21.3 percent from 2013.
More companies selling FIAs means more choices, and that appeals to agents and consumers, Moore said. As part of the deal, MetLife will also develop an FIA for MassMutual to distribute exclusively.
Since MassMutual primarily distributes its annuities through a career agency model, its agents will be selling primarily MassMutual annuities and new annuities developed by MetLife under the terms of the deal.
“Ultimately, MassMutual won’t necessarily be in competition with anyone,” Moore said. “While there are other companies selling indexed annuities primarily through a career agency distribution model, MassMutual will be the largest company distributing this way.”