The first half of 2012 saw a 10% decline in total retirement solutions sales in the U.S.  Variable annuities sales, which had increased remarkably in 2011, dropped 9% in 2012. This drop was expected as several companies including last year’s top sellers, MetLife (NYSE:MET), have decided to reduce risk and cut back on variable annuities. Variable annuities allow the customer to choose between various investment options to increase returns over a guaranteed minimum.
As a result of MetLife’s strategy, Prudential Financial (NYSE:PRU) has taken over the number one spot in variable annuity sales with almost 15% of the market share. The company’s recent pension risk transfer agreement with General Motors (NYSE:GM) (See Prudential Signs Agreement With General Motors For Pension Obligations) places it in a comfortable position, going forward. We currently have a price estimate of $56 on Prudential’s stock, in-line with the current market price.
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AIG Was One Of The Biggest Winners
AIG (NYSE:AIG) is also looking to gain ground after MetLife’s retreat. The company introduced a new variable annuity product designed to limit losses on market volatility, earlier this year. The offering proved to be quite popular as variable annuity sales increased by over 20%, year-on-year. Riding on the back of its success, AIG was able to increase its market share from about 4.5%, in 2010 and 2011, to 5.7%.
The company recently acquired broker-dealer, Woodbury Financial from industry peers, Hartford Financial Services Group, in order to boost distribution. We believe that AIG is fairly valued as our $35 valuation of the AIG’s stock is in-line with the current market price.
Jackson National Life, the U.S. subsidiary of UK’s Prudential Plc, displaced MetLife to become the overall leader in annuity sales for the first half of 2011. Manulife’s (NYSE:MFC) John Hancock Insurance was pushed out of the top 20 as it failed to cope up with increased competition in the market.
Is MetLife Prudent Or Panicking?
MetLife has taken a conscious decision to back out of variable annuity sales. In 2011, the company reported a 14% increase in retirement product sales. This increase was fueled primarily by a 50% increase in variable annuity sales as the insurer aggressively marketed its product. The increased sales came with a cost as the equity linked annuities were exposed to turbulent market conditions. The margins before tax for the company’s retirement division fell by 16%, prompting the company to reconsider its strategy regarding product sales.
We believe MetLife’s measures are justifiable considering the exposure to interest rates and equity risk. Despite conceding market share, the company will observe an improvement in margins. We have a price estimate of $39 for MetLife’s stock, which is 10% above the current market price.
You can gauge the effects of a change in forecast, by modifying the graphs shown aboveNotes: