HARTFORD, Conn. - The withdrawal of Aetna Life Insurance Co. from the guaranteed investment business will have little immediate impact on the GIC market as the industry shifts from traditional general account GICs to synthetic and other alternative products.
As the latest participant to exit the fully guaranteed investment business, Aetna now intends to focus its efforts on the fast-growing and more profitable defined contribution market through its mutual funds, and alternative GIC offerings as well as its separate account management operation.
An Aetna spokesman denied reports the company plans to spin off its investment management division, Aetna Capital Management, into a separate, stand-alone company. But, he said, Aetna officials have considered a name change for the division in order to provide it with a distinct identity unconnected with the parent insurance company.
"There has been no spinoff and no decisions have been made along these lines, and we are sending no signals to that effect," he said.
But Aetna's departure from the GIC business does further reduce an already dwindling list of high-quality insurance companies still actively involved in the intensely competitive general account GIC bidding wars. GIC sources say there are now between 15 and 20 high-quality carriers bidding for traditional GIC business, down from 40 to 50 in the mid-1980s.
Industry sources point to the decline in interest rates, the increasingly competitive nature of the GIC placement business that has cut insurance company profit margins on the contracts, continuing credit quality concerns and the shift toward synthetic products as reasons for the shrinking list.
"Insurance companies are finding it harder to make investments which provide the returns needed to stay competitive in GICs," said Scott Sokol, managing director with the investment banking firm of Chambers, Dunhill & Rubin & Co., Beverly Hills, Calif. "Insurance companies work on thin spreads, and with spreads on high-quality investments deteriorating, companies don't have the tools to offer the type of spreads to GIC buyers they have in the past. This will be an awakening for some plans that say they will only buy contracts from the 10 largest companies. They now will see that size isn't everything."
Aetna's announcement follows the withdrawal from the GIC market of other carriers such as Nationwide Insurance Co., Massachusetts Mutual Life Insurance Co., CIGNA and Mutual of New York, most of which pulled following the regulatory actions against Mutual Benefit Life Insurance Co. and Executive Life Insurance Co., according to Rich Cowan, principal with Brentwood Asset Advisors Inc., Santa Monica, Calif.
Meanwhile, most industry observers said they would not be surprised if Aetna did spin off its asset management business.
"They want to compete with other mutual funds and boutique investment advisory firms, and if they can establish their own identity as a stand-alone business, they may feel they can establish themselves in the market and retain their investment team. It has happened at other big financial services companies," said John Allen, consultant at Hewitt Associates, Chicago.
Murray L. Becker, president of Becker & Rooney Inc., a Teaneck, N.J., GIC consulting and investment management firm, said a spinoff "enables them to offer investment management products not associated with an insurance company. I would have expected them to have done that some time ago."
Aetna was among the top five carriers in the total amount of general account GICs outstanding, according to Fred Townsend, principal at the insurance rating and research firm of Townsend & Schupp Co., Hartford, Conn.
Aetna had approximately $9 billion in general account GICs outstanding at the end of September. That compares with industry leaders Prudential Life Insurance Co., with about $23 billion; Metropolitan Life Insurance Co., $16.2 billion; and John Hancock Mutual Life Insurance Co. and New York Life Insurance Co., with about $11 billion each, according to Townsend & Schupp.
Aetna has not actively marketed its GIC products for the past several months. Rather, it has been promoting its new separate account GIC product and plans to offer a synthetic GIC in the near future, according to Stephen F. LeLaurin, assistant vice president, Aetna Capital Management.
The Aetna separate account GIC, known as Stabilizer, has $2.7 billion in assets under management. Separate account GICs are similar to traditional GICs, but the underlying assets backing the contract are held in separate accounts. Contracts are not backed by the insurance company's general account assets.
Many insurers are starting to offer separate account products to protect plan sponsors from general account risk while investing the assets in high-quality fixed-income instruments.
But there are legal and regulatory questions clouding separate account products regarding the degree of protection contract holders have in the event of an insolvency.
Becker & Rooney's Mr. Becker said Aetna's $825 million after-tax charge against 1993 fourth-quarter earnings associated with dropping the GIC and single-premium annuity lines primarily is due to problem mortgages in its investment portfolio.
"These losses are created completely by mortgage problems; if they hadn't had mortgage losses there wouldn't have been any GIC losses," said Mr. Becker.
He said Aetna "was never a strong player in the highly competitive GIC bidding business" and developed much of its GIC business through its relationships with existing clients. He said Aetna's departure from the traditional GIC business is "not a big blow" to the industry. He does not expect other major carriers to throw in the towel in the same way as Aetna.
"Aetna had higher-than-average mortgage losses, so management decided to emphasize those sectors of the business where the opportunities to lose money are not as great by switching to products which are more fee oriented rather than guaranteed," said Mr. Becker. "This decision makes sense for Aetna."
Moody's Investors Service warned in late 1993 that Aetna's mortgage portfolio "is overweighted in problem property types, for which the outlook is negative." The Moody's report said Aetna's level of underperforming mortgage loans was increasing and had reached 22% as of March 31, 1993, amounting to about $3.6 billion in mortgages that were "delinquent, restructured or foreclosed." Non-performing mortgage loans represented about 11% of Aetna's invested assets, according to Moody's.
"The guaranteed pension segment .*.*. is facing the problem of having maturing mortgage loans that cannot be paid off by the borrowers, causing the company to use alternative cash flow to pay off maturing GIC contracts," said the Moody's report.
Aetna Capital's Mr. LeLaurin said Aetna dropped the GIC and single-premium annuity business because of the lack of profits.
