For a handful of large annuity issuers like Prudential, MetLife and Jackson National Life, the first quarter of 2010, like much of 2009, was a period of strong deferred variable annuity sales and growing market share.
But for the variable annuity industry as a whole, this year’s first quarter indicated no overall growth, alarmingly weak inflows of new cash, and a historically uncharacteristic failure for sales to improve in tandem with equity prices.
In fact, the variable annuity industry at mid-year 2010 looks more like the niche industry that its mutual fund rivals always said it was, rather than the heir to the Baby Boomer savings fortune that its advocates predicted it could be.
Innovation was widely evident in the past year, but none of it was game-changing. To use a basketball metaphor, John Hancock went “small” with its barebones AnnuityNote. The Hartford, Axa-Equitable and most recently Allianz Life created “zone” strategies, separating the underlying investments into an unrestricted risky sleeve and a risk-constrained protected sleeve. These strategies helped de-risk the products but didn’t grab the public’s or the intermediaries’ imaginations.
Instead, the bulk of the growthless pie went to the same type of product that sold well during the pre-crisis VA “arms race.” These are products that offer to double the benefit base after a 10-year waiting period. [For more on roll-ups, see below.]
Yet these complex, all-in-one products are not leading a broad-based VA rally. “With living benefits now more restrictive and expensive, on balance, muted future sales growth is expected unless the product is utilized by more advisors and understood and embraced by more investors,” wrote Frank O’Connor, director of Insurance Solutions at Morningstar, Inc.
| Variable Annuity Sales Leaders, By Issuer (1Q, 2010) | |||||
|---|---|---|---|---|---|
| Sales rank | Issuer | Sales | Mkt share | ||
| 3-31-10 | 3-31-09 | 3-31-10 | 12-31-09 | 3-31-10 | |
| 1† | 4 | Prudential Financial | 4,865.6 | 4,799.6 | 15.59 |
| 2 | 1 | Metlife | 4,036.0 | 3,716.9 | 12.93 |
| 3 | 2 | TIAA-CREF* | 3,448.5 | 3,550.6 | 11.05 |
| 4 | 8 | Jackson National | 3,134.0 | 3,335.4 | 10.04 |
| 5 | 7 | Lincoln Financial Group | 2,038.0 | 2,234.6 | 6.53 |
| 6 | 3 | Axa Equitable | 1,477.3 | 1,465.3 | 4.66 |
| 7 | 11 | SunAmerica/VALIC | 1,377.0 | 1,293.8 | 4.41 |
| 8 | 9 | Ameriprise Financial | 1,191.7 | 1,364.5 | 3.82 |
| 9 | 13 | Nationwide | 1,035.3 | 1,106.6 | 3.32 |
| 10 | 16 | Sun Life Financial | 837.5 | 715.0 | 2.68 |
| Total | 23,440.9 | 23,582.3 | 75.03 | ||
| *Group variable annuities. †Bold indicates higher rank this year. Source: Morningstar, Inc. |
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Except for a happy few, little if any new cash is moving into variable annuities. Net flows for 1Q 2010 were positive at $3.6 billion, but were only 11.6% of total sales ($31.2 billion, down from $31.4 billion in 4Q 2009). In 1999, net flows were 38.7% of sales. Prudential Financial was a noteworthy exception, reporting net flows of $3.2 billion on gross sales of $4.8 billion in the first quarter. As much new money raced into ETFs in May alone as went into VAs in the whole first quarter.
Net flows represent the difference between total sales and surrenders, withdrawals, benefits and payouts. Because of market gains, however, total VA assets were $1.398 trillion on March 31, 2010, up 3.2% from the year-end 2009 value.
Sales are increasingly concentrated among big companies with big hedging and risk management capabilities and high strength ratings. According to Morningstar’s first quarter VA report, just five big firms accounted for 56% of VA sales. A mere 10 companies accounted for 75% of sales, up from 69% five years ago.
Of the ten best-selling products (excluding TIAA-CREF’s mega-group annuity), Jackson National had two (Perspective B and L shares), Prudential had three (APEX II, XTra Credit Six and Advisors Plan III) and MetLife had three (Preference Premier, Investors Series B and L shares). SunAmerica VALIC’s Portfolio Director was fifth and Allianz Life’s Vision contract was ninth.
Since the crisis, some companies are gaining share and some are losing share. In addition to Prudential Financial and Jackson National, these include Lincoln Financial, SunAmerica/VALIC, Ameriprise, Nationwide SunLife Financial, Aegon/Transamerica, Thrivent, and Protective. Conceding significant market share in the past year, perhaps in a conscious attempt to regroup and reassess their risk position and market strategies after the crisis, were Axa Equitable, ING Group, and John Hancock.
Most of those innovations introduced in the past year have served to lower the risks to the issuers and correct the cutthroat pricing that was evident before the crisis. Many issuers reduced the age-related payout rates during the income phase. Faced with the higher hedging costs that low interest rates produce, they’ve tended to de-value the product rather than enhance it.
GLWBs are still popular, though it’s not clear whether investors elect the rider as an income tool or as a safety net for a worst-case scenario. According to the Insured Retirement Institute, about 70% of VA purchasers in the first quarter of 2010 elected a guaranteed lifetime withdrawal benefit. That data did not include all major issuers, however.
| Variable Annuity Sales Leaders, By Contract (1Q, 2010) | |||||
|---|---|---|---|---|---|
| Rank | Contract | Issuer | New Sales 1Q 2010 | Market Share | |
| 1 | Perspective II | Jackson National | 1,563.6 | 5.01 | |
| 2 | APEX II | Prudential Financial | 1,242.3 | 3.98 | |
| 3 | Perspective L | Jackson National | 1,072.2 | 3.44 | |
| 4 | XTra Credit Six | Prudential Financial | 1,014.1 | 3.25 | |
| 5 | Portfolio Director* | SunAmerica/VALIC | 995.7 | 3.19 | |
| 6 | Advisors Plan III | Prudential Financial | 913.7 | 2.93 | |
| 7 | Preference Premier | MetLife | 770.5 | 2.47 | |
| 8 | Investors L-4 Year | MetLife | 757.2 | 2.43 | |
| 9 | Vision | Allianz Life | 579.3 | 1.86 | |
| 10 | Investors VA | MetLife | 575.3 | 1.84 | |
| *Primarily group annuity product. List doesn’t include TIAA-CREF Retirement and Supplemental Retirement Annuity, with $3.381 billion in sales in the first quarter of 2010 and a 10.83% share of all variable annuity sales. Source: Morningstar, Inc. | |||||
From a marketing perspective, as mentioned above, the most compelling product feature appears to be the deferral bonus or “roll-up” during the accumulation stage. This incentive against immediate use of the guaranteed income feature may have started as a secondary product feature. But it may now be the product’s most salient selling point.
It makes sense. With investors and advisors reportedly more fearful of sequence-of-returns risk than longevity risk, a strong roll-up feature—which protects a nest egg from damage that retirees won’t have time to recover from—should be a more compelling feature than the lifetime income benefit itself.
The most successful VA products offer big roll-ups. The leading contracts from Prudential Financial, the first quarter sales leader ($4.87 billion, 15.6% market share), feature the Highest Daily 6 (See article in this issue on “Rich VAs”). Jackson National Life, with the first and third top-selling products (after the TIAA-CREF group annuity) offers an equally strong deferral bonus.
Other firms with big deferral bonuses include MetLife (second overall in sales for the quarter), Nationwide and Genworth. Three smaller firms, Integrity Life, Ohio National and Guardian, offer similar deals.
“Lite” annuities aren’t selling well so far. The simplified AnnuityNote product from John Hancock, which simply pays out five percent of the benefit base for life starting five or more years after the original investment, wasn’t among the 50 best-selling contracts in the first quarter. It was introduced in June 2009. The product’s reduced commission hasn’t played well among wirehouse brokers.
In the VA distribution world, first-quarter trends indicated business-as-usual. Two channels, the independent channel (34.6%) and captive agent channel (32.8%), continue to account for the bulk of VA sales. B shares (48%)and L shares (25.2%) accounted for the bulk of sales. L-shares typically have a shorter (4 year versus 7 or 8 year) surrender period than B shares but a higher ongoing fee that provides a trail to the advisor.
As in previous quarters, large-blend equity funds were the most popular VA investment options, with about 32% of assets, according to Morningstar. “Moderate allocation” was next with 19.7%, followed by large Ggrowth with 12.2%. The most widely-offered fund was the Fidelity VIP Contrafund Service 2, with 33 contracts offering it in 438 subaccounts. The two funds with the most assets were American Funds’ IS Growth 2 and Growth-Income 2, with $15.5 billion and $14.4 billion, respectively.
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