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How Many VA Owners Will Bail Out?

Posted on June 30, 2010 by -

With billions of dollars worth of variable annuity contracts with in-the-money living benefit riders leaving their surrender periods over the next 18 months, the issuers of those contracts will soon learn how accurate their lapse rate assumptions have been.

For those who guessed right, no great shocks are likely to occur. But if issuers erred on the high side, say analysts at Oliver Wyman Group, lower-than-expected lapse rates could translate into higher-than-expected reserve requirements and a potential dent in profitability.

Generally, the presence of income guarantees is expected to result in stickier policies. “We should see lower lapses than in previous nonguaranteed blocks,” said Todd Solash, partner, and senior manager Aaron Sarfatti at the global consulting firm, which advises insurance companies on risk management and overall strategy.

As a result, aggregate reserve requirements could rise by $1 billion to $5 billion over the next 18 months for the $400 billion in outstanding VAs with living benefits, they said.

“This is approximately 10% of total industry general account reserves for living benefit guarantees,” says a recent Oliver Wyman report, A question of legacy: Measuring and managing behavioral risk in variable annuities. “Should this adverse scenario unfold, it will slowly, but surely, erode the capital position of many leading variable annuity writers who would have to post reserves and capital for the policies they had expected to lapse.”

Most issuers did a good job of hedging the market risk associated with their VA guarantees, but they didn’t necessarily anticipate policyholder behavior risk in their models, according to the report. “The magnitude of the behavioral risk wasn’t as well studied as market risk,” Solash said.

The potential magnitude of lapse rate risk is still unknown. According to the report, if the S&P 500, now at about 1,050, rises to 1,250, the reserve requirements will be much lower than if the index drops to 800. The impact will also vary by carrier, depending on the size of their VA/GLWB book of business, their lapse assumptions, the degree of  “in-the-moneyness” of their riders, and the channel in which they distributed the contracts.   

About 14% of issuers believe that lapse rates vary by channel, according to a 2009 Society of Actuaries survey of 29 issuers. “All of those indicating a difference distinguished between internal distribution (captive agency) and external distribution (brokers, banks, independent agents), with the latter having higher lapses,” an SOA report noted. 

Policyholder persistency would be good if most variable annuity guarantees were out-of-the-money or at-the-money. Many contracts are in the money, however, despite the partial recovery of equity markets from the 2008-2009 market crash.  

Issuers would be happy to see those contracts lapse. But contract owners are less likely to want to give up the now-valuable guarantees. Their advisers, mindful of suitability standards, are also less likely to recommend 1035 exchanges that would nullify the guarantees.

Therefore lapse rates in coming months might be lower than the actuarial assumptions. “[Many carriers] used historical 20% lapse rates, and the guarantee will reduce the lapse rate. It took the crisis to test the assumptions,” said Sarfatti.

The deferral bonuses or “roll-ups” that carriers offered to discourage early withdrawals from VAs with income benefits are also likely to make the contracts stickier. “I wouldn’t call [the rollup] a helpful feature” in this context, Solash told RIJ.

“The rollups can be risk mitigating in product design, but with falling interest rates and equity prices, roll-ups greater than the interest rates can be a very expensive feature.” He doesn’t believe that roll-ups will be a primary cause of lapse rate surprises, however.

The “rationality” of policyholders is one of the wild cards in forecasting lapse rates. A perfectly rational policyholder (such as a professional investor or hedge fund manager) might be counted on to surrender an out-of-the-money contract and keep an in-the-money contract. But policyholders aren’t always rational, and don’t necessarily take maximum advantage of their guarantee. Some are forced by economic hardship to cash out their contracts at the end of the surrender period.

People have also presumably purchased VA/GLWB contracts for a variety of reasons. For some, the income feature may have been the primary reason. For others, it may have been a secondary consideration. For those clients, lapse rates might be higher. 

Along with the Society of Actuaries, several consulting groups have studied VA/GLWB lapse rates in recent years. Towers Perrin, Deloitte LLP, and Germany’s Risklab are among them.

They tend to agree that there’s a shortage of hard data on behavioral risk. “Historic experience is sparse for variable annuities, and companies usually have a very high level estimate regarding the level of rationality of their policyholders,” said Deloitte actuaries in a slide presentation, “Residual and Ancillary Risks in VA Guarantees.”    

In its research paper, Oliver Wyman suggests that in the future VA issuers take the following steps to protect themselves against behavioral risk:

  • Improve behavior modeling and forecasting capabilities
  • Integrate behavioral risks more fully into risk management protocols
  • Revive the variable annuity reinsurance market

The paper also suggested that VA issuers answer these questions:

  • Which of my in-force blocks are most exposed to behavioral risks?
  • How conservative are my lapse and utilization assumptions relative to peers? Relative to experience?
  • What would be the impact on earnings and capital through 2012 if lapse rates for guaranteed businesses fall 25% and 50% below expectation?
  • How does market performance affect this impactWhat is the transaction cost incurred via the dynamic hedge program? By how much would this expenditure decrease if market exposure tolerances were doubled?
  • More broadly, how should I incorporate the uncertainty around behavior in the design and execution of my hedging strategies?
  • Do I have a business plan if behavior is worse than expected over the coming years?

“Too Good to Last”

Posted on June 30, 2010 by -

“HIGH YIELD,” said the headline on the tiny 2” x 4” display ad in The New York Times. It was followed below by these words: “Pre Owned Annuities, Lottery Payments and Structured Settlements. Earn 7% to 9% in a 3% to 5% world.”  

Through a handful of ads like that and by word-of-mouth, retail investors are discovering that they can now buy the rights to “secondary market annuities” paid by A-rated insurance companies and get better—often much better—returns than conventional fixed income investments.

But, as RIJ learned in conversations with representatives at firms that either originate (“factor”) these products or market them or both, secondary market annuities aren’t for the unsophisticated, the unwary, the impatient or the meek.     

At their simplest, “they’re like real estate transactions,” one specialist said. He didn’t want his name used because he doesn’t want to stir up undue interest in what is only a $600 to $700 million-a-year business—interest that would only drive up prices. “They’re not too good to be true, but they’re too good to last,” he said.

Said another intermediary, who also asked for anonymity, “What has happened over the last seven months is that we’ve seen the inventory evaporate and the yields go down. To broadcast information about the products is to eat our young, so to speak.” 

The availability of such products to retail investors didn’t even exist until a year ago. Structured settlement firms used to be funded entirely by institutional investors, which bought them to diversify their portfolios, or by investments banks, which securitized them.

At big structured settlement firms like J. G. Wentworth, that business appears to live on, in a fashion. But the financial crisis ended the era of inexpensive financing and for many smaller factoring companies the securitization option became too expensive. To survive, some firms have turned to retail investors for financing.  

High returns notwithstanding, the new offerings have drawbacks. While the payouts are guaranteed by A-rated insurers, the investments are neither securities nor insurance products. The secondary annuity market is not regulated, nor are the factoring companies. The transactions aren’t as transparent as some would prefer.

The products themselves aren’t standardized, like primary market annuities. Each tends to be one-of-a-kind, like real estate, often providing idiosyncratic payment streams that adhere to the terms of the original structured settlement. And they’re illiquid. If the owner dies, for instance, there’s no immediate payout to beneficiaries. Then there’s interest rate risk. If rates skyrocket, you’re usually stuck with what you’ve got.

How they work

Secondary market annuities provide multiple or single-payment distributions over short or long periods. The distributions are paid by the insurance companies exactly as they would have been to the original owners. In this case, investors are not buying paper issued by an ad hoc securities firm or tranches in a murky pool of structured settlements.  

“But you need to be careful, because both kinds of investments do exist,” said one of the intermediaries mentioned earlier.

Rather than an investment, the transaction involves the reassignment of an insurance company obligation from the original owner—the plaintiff in a damage suit—to a purchaser. The yields are high only because of the obligations sell at a discount of about 20%, and not because the annuity issuer itself offers high returns.

“These are court-ordered assignments from insurance companies,” said Scott Schwartz of Woodbridge Structured Funding, LLC, which has been in the structured settlement business since 1993, but only recently switched to selling secondary market annuities to retail investors after investment banks hiked their charges for securitization.

To purchase an annuity from Schwartz, you first have to get on his inventory list. Then he tells you what factored products are available each day, specifying the carriers, the purchase prices, the payout schedules and the effective annual yields.

The products are tricky but not impossible to resell. “But people buy them to diversify their portfolios, not to resell them,” Schwartz told RIJ. Demand is strong. “We’ve had about 50 deals a month and we sell every one of them,” he said. Investments usually range from $50,000 to $150,000, but can be as small as $15,000 or as large as $3 million.

Keith Singer, an attorney and CFP who owns Florida-based Insured  Returns LLC, is also in the secondary market fixed annuity business. “The  factoring companies are selling a receivable,” he told RIJ. “It’s an  assignment of future payments. Buyers receive insurance company obligations. Whatever rights the original owner had, are assigned to the purchaser.

“[As an intermediary,] I may have access to three or four different future income streams at any given time. I tell clients, these are the rates, and if the product meets their needs, we proceed. However, prior to purchase we need to do a credit check and public records search of the seller. 

“There is a possibility that if the seller has child support obligations or a divorce agreement, there may be other claims against those future annuity payments. The title search is not unlike the title search for a house. The process is similar to buying a house.  Money goes in escrow, the buyer receives a court order and other documents from the insurance company providing good title to the future annuity payments, and then the funds are released to the seller,” Singer said.

A slew of A-rated issuers

At Annuityfyi.com, where individual investors can view all kinds of annuity and find phone numbers to connect with broker dealers, you can see examples of recent offerings. For instance, there’s a MetLife product that cost $48,186.44 and paid out an annuity-like $450 a month from 2017 to 2027 and $1,165 a month from 2027 to 2037.

The total payout is $186,810 over 20 years, which translates to an effective annual interest rate of 7.75%, according to the website. Alternately, you’ll find a Prudential product that cost $62,166 and paid $310,000 in three payments, five years apart: $65,000 in 2026, $100,000 in 2031 and $145,000 in 2036. The yield: 7.75%.

A State Farm Mutual product, purchased for $109,000, paid a lump sum of $240,000 in 2021, for a 7% yield. A Monumental Life annuity cost $164,960 and paid out $3,400 a month for 105 months (a total of $357,000) from 2017 to 2025, for a 7.25% effective yield.

Other offerings include annuities originally issued by Allstate, American General, Aviva, Fidelity, Genworth Financial, John Hancock, New York Life and Pacific Life. As the examples show, payout rates can be lumpy or smooth. The original owners may have sold only certain portions of their annuities, depending on the timing and the amount of their need for cash.

One intermediary told RIJ that none of the products at Annuityfyi.com are currently available; if they were, he said, another factoring company might “poach” them from the current factor, much as one real estate agent might try to take a listed home away from another. Apparently, that’s part of the strange and evolving world of secondary market annuities.

New VA Contracts from Smaller Issuers

Posted on June 23, 2010 by -

Mary Beth Franklin, the well-known Kiplinger’s retirement writer, mentioned to a group of journalists recently that she herself had bought a variable annuity with a living benefit recently. One of the reporters asked which company issued it. Ohio National, she said. It was just an honest answer, not necessarily an endorsement or recommendation. 

This spring, Ohio National filed a prospectus for (and perhaps markets by now) one of the four relatively new contracts that RIJ highlights this week. Last week, during the first week of a two-week update on VAs and the VA market, we focused on new products from the biggest of the insurance companies. This week, we focus on four new products from second-tier or regional insurers, all of them with A-level strength ratings from Moody’s, Fitch and Standard & Poor’s.  


CUNA Members VA III

This contract from CUNA Mutual (rate A, Excellent, by Best), which ranks 29th among the top-selling variable annuity issuers, offers two living benefits, a guaranteed minimum accumulation benefit (GMAB) and guaranteed lifetime withdrawal benefit (GLWB), along with a 3% annual deferral bonus.

Contract owners can choose to pay their annual rider fee as a percentage of their income base (currently 1.75%) or as a percentage of their account value (1.00%). Most living benefit fees are pegged to the income base, which is likely to become significantly higher than the account value, which withdrawals and fees substantially reduce over the life of the contract.

The GLWB rider allows a choice between an Income Now and an Income Later option. As the names imply, the Income Now option is intended for people who expect to take income soon, and the Income Later is for people who expect to wait several years. Both currently offer a deferral incentive of three percent (simple interest per year) for 10 years, but owners who elect Income Later can renew their incentive two years after a withdrawal. Those who elect Income Now cannot.    

The age-related payout rates are more graduated than in most other income riders. Under the Income Now option, payouts start at 4.1% for the single coverage and 3.6% for joint coverage at age 55, and rise by one-tenth of a percentage point for up to 30 years.

Under the Income Later option, the age bands for single coverage are 3% for ages 50 to 54, 3.75% for ages 55 to 60, 4% for ages 61 to 64, 4.5% for ages 65 to 69, 55 for ages 70 to 74, 5.25% for ages 75 to 79, and 5.5% for ages 80+. The payouts are 50 basis points per year less for joint contracts.

The contract also offers an optional premium credit. A purchase payment credit of 4% is available for premiums under $250,000, 5% for up to $500,000, and 6% for $500,000 or more. The first-year surrender charge is 8%, for both the B and L. The M&E fee, plus the administration fee, is 1.30% for the B share, 1.75% for the B share with the premium credit, and 1.80% for the L share.

Fund operating fees range from 74 bps to 154 bps, and there are investment restrictions for contract owners who elect either a living benefit. For instance, GMAB clients must keep 50% of their assets in a bond account and GLWB clients must keep up to 40% in a bond fund, depending on how much freedom they want to invest the rest of the money as aggressively as they wish.

 

Guardian Investor Variable Annuity L Series

Like CUNA, Guardian (rate A++, Superior, by Best) is a mutual insurer. In the first quarter of 2010, it ranked 25th in variable annuity sales, with a modest $170.8 million in premiums. Its Investor L Series, however, has features as big and as eye-catching as the contracts offered by top-sellers like Prudential and Jackson National. The minimum initial premium is $10,000 for non-qualified money and $2,000 for qualified.

For instance, under the Target 200 and Target 300 GLWB options, there’s a 7% rollup that promises to double your income base after a 10-year wait and triple it after a 15-year wait. The Target 300 isn’t available in New York State. Alternately, there’s a Target Future (7% rollup, year by year) and a Target Now program that allows contract owners to step up the value of their income base to their account value, if higher, on each contract anniversary.

The payout rates are 3% a year for those age 59 and younger, 4% for those ages 60 to 64, 4.5% for those ages 65 to 69, 5% for those ages 70 to 79, and 6% for those age 80 or older.

The contract isn’t cheap. The M&E plus the administration fee is 1.65% a year, and the GLWB options currently costs 65 basis points (for Target Now), 75 basis points (for Target Future) 95 basis points (for Target 200) and 1.20% (for Target 300). The spousal options are 10 to 40 basis points higher.

The fund fees range from 36 to 168 basis points. Funds include offering by Alger Capital, BlackRock Global Investors, Columbia, Davis, Evergreen, Fidelity, Franklin, Invesco, Templeton, MFS, Oppenheimer, PIMCO, Pioneer, RiverSource, RS Investment, Van Kampen, and Value Line.

 

Ohio National Life OnCore Series

Annuityfyi.com, a website that markets annuities direct to consumers, currently rates the Ohio National GLWB as its “top pick.” The reason: Ohio National (rated A+, Superior, from Best) increases the minimum income base by 8% (simple interest) for every year in which no withdrawal is taken, and promises that the income base will be at least double the initial investment after 10 years.

The contract, not surprisingly, is low on liquidity, with a nine-year surrender period starting at 9% for the B share. The minimum initial investment is $5,000. During the accumulation phase, a step-up to the account value on a contract anniversary automatically restarts the waiting period for a fresh 10 years.

The payout rates are 4% from age 59½ to 64, 5% from 65 to 79, and 6% for those 80 and over. During the income phase, if the account steps up in value after the client enters a new age bracket, he or she can graduate to the next higher payout rate.

Fund fees range from 36 basis points to a maximum of 6.87%. According to the prospectus, the highest fund fees occur only if the fund companies rescind fee waivers currently in effect. Fund companies include Ohio National, AIM, ALPS, Dow Target, Dreyfus, Federated Insurance, Fidelity Franklin Templeton, Ivy Funds, Janus Aspen, Legg Mason, Dreyfus, Lazard, Morgan Stanley, Neuberger Berman, PIMCO, Prudential, and Royce.

The M&E charge and account expense charge together are 1.40% for the B-share product, and 1.70% for the bonus product. The current GLWB fee is 95 basis points (105 joint). The fee for the annual step-up benefit alone is 25 basis points. As an alternative to a GLWB, for 55 basis points a year, Ohio National will guarantee the principal value for 10 years.

For GLWB, the contract owner must invest in the middle three of five allocation models—Moderately Conservative, Balanced, and Moderate Growth, which all have pre-set allocations. There’s a 4% credit on the first $250,000 in premium, and a 5% credit for any amount of premium above $250,000. If more than $250,000 in premium is paid in the first year, the entire premium receives a 5% credit.

 

Integrity Life (Western & Southern) VAROOM

If you’re looking for a variable annuity that offers all exchange-traded funds as its investment subaccounts, this yet-to-be-approved $25,000-minimum contract from Integrity Life, a unit of Western & Southern Financial Group (rated A+, Superior, by Best), may be the ticket. Here’s the list of ETF options, by category:

 Equity Subaccounts

iShares® S&P 500 Index Fund

iShares® S&P 500 Growth Index Fund

iShares® S&P 500 Value Index Fund

iShares® S&P MidCap 400 Index Fund

iShares® S&P SmallCap 600 Index Fund

Vanguard® Dividend Appreciation Index Fund, ETF Shares

Vanguard® Large-Cap Index Fund, ETF Shares

Vanguard® Mega Cap 300 Index Fund, ETF Shares

 

Fixed Income Subaccounts

iShares® Barclays Aggregate Bond Fund

iShares® Barclays Intermediate Credit Bond Fund

iShares® Barclays TIPS Bond Fund

iShares® iBoxx $ High Yield Corporate Bond Fund

Vanguard® Intermediate-Term Corporate Bond Index Fund, ETF Shares

Vanguard® Total Bond Market Index Fund, ETF Shares

Vanguard® Variable Insurance Fund Money Market Portfolio

 

International and Alternative Subaccounts

iShares® S&P/Citigroup International Treasury Bond Fund

Vanguard® Emerging Markets Stock Index Fund, ETF Shares

Vanguard® Tax-Managed International Fund, Europe Pacific ETF Shares

Vanguard® REIT Index Fund, ETF Shares

 

ETF fees range from only 9 basis points for the S&P 500 Index to 50 basis points for a high yield bond fund. The contract, which has a five-year surrender period with a 7% maximum charge, has a combined M&E and administration charge of 1.75%, two GLWB options, and payout age-bands of 4% for those ages 60 to 64, 4.5% for ages 65 to 69, 5% for ages 70 to 74, and 5.5% for ages 75 and older. The payouts in a joint contract are based on the age of the younger spouse.

There are two GLWB options, one for 60 basis points and one for 80 basis points, depending on how much investment freedom the contract owner or the advisor wants. The extra 20 basis points apparently gets you access to a REIT ETF and an emerging markets equity ETF. The charge is the same for single and joint contracts, but the payout in a joint contract is only 90% of the payout of a single.

Here’s something a bit unusual. Rather than a roll-up, Integrity Life offers to increase the payout rate by 10 basis points for each full calendar year that the contract owner doesn’t take a withdrawal during the accumulation stage. During the first year, there’s a 75 basis point addition to the payout rate if the contract is purchased in the first quarter of the calendar year.    

 

© 2010 RIJ Publishing. All rights reserved.

Plugging Leaks in VA Guarantees

Posted on June 22, 2010 by -

Insurers need to make “fundamental changes” in the way it manufacturers variable annuity living benefits, according to Milliman, the global consulting firm that already provides hedging expertise to many if not all of the major VA manufacturers.

Those fundamental changes—Milliman suggests three in a recent white paper—involve sharing more of the product’s exposures to market risk, interest rate risk and other risks with the clients, but doing it in a way that makes the product more, not less, attractive. 

Without the changes, “it is not clear that the life insurance industry can continue to offer VAs,” write Milliman actuaries Ken Mungan and Deep Patel in their paper, “Sustainable Manufacturing of Variable Annuities: Toward a new model.”

“It is clear that there are significant changes underway in the VA market. We can expect a new market equilibrium to emerge over the next 12 to 24 months,” the paper said. That’s scary talk, but then hedges are insurance, and when you sell insurance you emphasize the worst case. In any case, here are the main elements of  Milliman’s Sustainable Manufacturing Model:

Let the client buy the hedges 

When market downturns occur and VA account values drop, the amount of money backing the guarantee drops. To blunt this effect, VA issuers buy capital market hedges, which rise in value as markets decline. Milliman proposes that the contract owners buy the hedges, along with stocks and bond funds, and hold them in the separate account.

The issuer would still ultimately be on the hook if the hedges failed to protect the account value, but it wouldn’t get beat up by short-term volatility in hedge costs. This design change would also shift basis risk—market risk that plain-vanilla hedges can’t cover—to clients. If insurers don’t have that risk, Milliman says, they can offer a wider range actively managed funds. 

Design asset allocation models to target a specific volatility level

Instead of offering asset allocation models that include different percentages of equity investments, Milliman recommends, insurers should offer model portfolios that target a specific volatility level.

The technique sounds similar to the asset transfer method that Prudential uses to limit damage to the account value during a downturn. Prudential has an algorithm that automatically moves money out of equities and into bonds when equity prices fall. But Milliman suggests that managers of the model portfolios re-allocate money when volatility rises, without waiting for prices to actually fall.   

“As equity market volatility increases, fund managers shift assets from equities to bonds,” Milliman’s paper says. “Similarly, as market volatility declines, assets are shifted from bonds to equities. Managers adjust the allocation periodically to stay on target, by means of transfers among underlying funds or the use of a hedge overlay.”

Re-design products to reduce interest rate risk

Interest rate risk is a big problem for VA hedging operations. The Fed-engineered reduction in interest rates in 2008 caused a sharp rise in the costs of the hedges, which are like long-term put options.

Milliman recommends design changes that link the roll-up rates (automatic increases in the benefit base during the accumulation stage) and the withdrawal rates during the income stage to the 10-year Treasury rate, so that promises become less rich when rates fall.  

On the other hand, the promises become more rich when rates rise, giving contract owners more incentive to keep their contracts rather than surrender them or exchange them for high-paying fixed rate annuities.     

Obstacles and benefits

As you might guess, adopting the Sustainable Manufacturing Model probably won’t be cheap. It “requires the creation of new types of VA subaccounts that contain hedge assets,” which “will require the ongoing management of a hedge program, and the insurer will need to coordinate residual on-balance-sheet hedging,” the paper says.

Strategic partners and intermediaries will also face a learning curve. “Traditional asset managers are generally not well positioned to manage hedge assets within VA subaccounts.” “Buy-in from financial advisors” will also be needed, the authors wrote.   

But there’s an upside, Milliman argues. For clients who want more investment risk in their annuity portfolios, these changes will give them more of what they want. More importantly, they can reduce a VA manufacturer’s risks and perhaps determine whether it’s worth staying in the VA business at all. 

 

 

© 2010 RIJ Publishing. All rights reserved.

Reflections of a VA-Selling Advisor

Posted on June 22, 2010 by -

For insurers who market variable annuities through independent advisors, G. Jacob “Jay” Hauenstein III, a 43-year-old financial advisor in Laurel, Mississippi—the nearest large town is Hattiesburg, to the south—would be a good example of their target intermediary.

 About $10 million of the $35 million that he manages for individual clients is in variable annuities with guaranteed lifetime withdrawal benefits. In 2009, he did no VA business at all, because his high-benefit product of choice was taken off the market. But this year his clients have added about $1 million to a new set of products. He spoke with RIJ recently about the role of VAs in his practice.

 “Last year I just about totally got out of that product,” said Hauenstein, who has been a member of the Million Dollar Roundtable Annuity Advisory Board. “I didn’t sell one variable annuity the whole of last year and put no additional money into the ones that I had on the books. I focused on the insurance side for a while and that kept me busy. With the downturn most people were not doing any additional investing. People want guarantees when times are scary.

 “But this year I’m back in the game in a pretty big way. When the market seemed to bottom out and level off I did my homework again and came up with a couple of players who still have a solid product. MetLife has a good product, the Investors Series L. I’m doing most of my business with Prudential, the L-series. Guardian’s product’s OK. Their benefits aren’t quite as lavish but they still have a solid product and there’s backing there. Some clients just like that ‘old line’ type of mutual insurance company.

 “Throughout the downturn, all of my clients have been extremely happy with the variable annuity products I’d put them in. In the case of my largest client, she has depleted a lot of her initial investment between the downturn and what she has spent. But thanks to the rollup, which matures this coming year, she is actually slightly ahead of what she’s put into it. And she’s put in a fortune. 

 “I’ve looked at VAs harder and harder over the years. By the time you put all the fees and hidden expenses into it, you’re going to need market performance of pre-2000 levels to make the things really gain. In the future, you probably won’t have the kind of gain they talk about in the sales literature, so your true gain is in your rollup.

 “The strength has got to be that rollup. I can’t put somebody into something where they get to retirement age and their investment may be worth half of what they put into it, or if we get them up t $2 million and it goes to half of that. [The rollup] is a huge factor for me, along with the investments and the death benefit.

 “Some guys hit it lucky and have exactly the right combo of timing and investments. One of my previous clients doubled his money in four years and actually got into the step-up as opposed to the 7% guarantee. He took a beating when the market turned upside down like everybody else, but he made more than his guarantee.

 “I work with a lot of clients where the only money they put into the variable annuity is their ‘reserve’ fund. We don’t expect to touch it if we don’t need to. The product I used in the past solved that problem beautifully, because the living benefit and the death benefit were identical. If the client died, he passed on the maximum.

 “It frustrated when my bread and butter [product was eliminated by the issuer during the financial crisis]. I found good replacements with MetLife and Prudential. In MetLife’s benefit, the continuity for the spouse is better, while with Prudential the primary investors will do the best of the two.”

 [Hauenstein and his clients at one time chose mainly A-share variable annuities, because many high net worth clients seemed to prefer to pay distribution charge all at once. But he realized that he was not being paid to service the A-share clients that he’d inherited from his father and partner. So he switched to L-share contracts, which pay a trail commission.]

“The L-share gives you smaller upfront and a trail going forward,” he said. “That was much more appealing than taking an extra point up front. In my experience, guys who take the A-share usually push the clients they’d already sold toward the back burner.

 “I don’t swing for the fences anymore in my investments. Too many advisors are overly aggressive, and overly optimistic. It depends on where you’re going. With the person who’s 40 years old, you can be aggressive. But you can’t do that with a 55-year-old. I’ve gone more to value-growth as opposed to aggressive-growth. I can serve my clients best by not being greedy. I don’t try to get that one last dollar by exposing five dollars. It seems to have paid off.”

 

 

© 2010 RIJ Publishing. All rights reserved. 

SEC Proposes More Disclosures for TDFs

Posted on June 22, 2010 by -

The Securities & Exchange Commission has issued several proposals to strengthen its rules for the advertising and marketing of target-date retirement funds, Pensions & Investments reported.

Under one proposed rule, marketing materials that include a date in a target date fund’s name must also disclose the fund’s asset allocation at the target date. Another proposal would require marketing materials to include a table, chart or graph that depicts the asset allocations among types of investments over the life of the fund.

“The table, chart, or graph [must] be immediately preceded by a statement explaining that the asset allocation changes over time, noting that the asset allocation eventually becomes final and stops changing, stating the number of years after the target date at which the asset allocation becomes final, and providing the final asset allocation,” according to an SEC fact sheet on the proposals.

The SEC also proposed to require target-date fund marketing materials to state that a target date should not be selected based solely on age or expected retirement date. In addition, fund disclosures would have to say that investments in target-date funds aren’t guaranteed.

A review by SEC staff had revealed that funds with the same dates had equity exposures of 25% to 65% at their target dates. Even at the fund’s “landing point,” when it reaches its most conservative point and stops changing, the equity allocations of funds with the same target date ranged from 20% to 65%, said SEC chairman Mary Schapiro said.

“Investors need more information than just the date in a fund’s name,” Ms. Schapiro said. “They need context in order to evaluate what the date means and what the fund’s projected investment glidepath is.”

The public will have 60 days to comment on the proposals after publication in the Federal Register, according to John Heine, an SEC spokesman. Publication is expected “as soon as possible,” Mr. Heine added.

© 2010 RIJ Publishing. All rights reserved.

Loyalty to Plan Providers Varies By Plan Size—Cogent

Posted on June 22, 2010 by -

When asked to rank their loyalty toward a dozen or so prominent plan providers, sponsors of small, medium-sized and jumbo 401(k) plans come up with different rankings, according to the Cogent Research Retirement Planscape 2010 survey of about 2,200 U.S. plan sponsors.

 For instance, while Vanguard generated the most loyalty among jumbo plan (> $20 million in assets) sponsors, it ranked only fourth among sponsors of medium size plans ($5 million to $20 million) and tenth among micro plans (assets < $5 million). 

Cogent concluded that plan providers are able to win loyalty in each size-tier to the extent that they choose to specialize in meeting the needs that are characteristic of each tier. According to the survey:

  • Bank of America Merrill Lynch was the plan provider with the most loyal customers among the micro plans, where administrative support is the highest driver of sponsor loyalty. ING and Mass Mutual ranked second and third.
  • Fidelity Investments had the highest loyalty among mid-size plans where the most important criteria are plan participation support, fees, and administrative support. Principal Financial and Mass Mutual ranked second and third.
  •  Vanguard had the most allegiance among large plan sponsors, where “the ability to help sponsors with participant communications and problem solving has a critical impact on loyalty.”  Charles Schwab and Fidelity ranked second and third.

 “These findings reflect the day-to-day realities that sponsors face across the full spectrum of plan sizes,” said John Meunier, Cogent Principal. “Micro-plan sponsors need help getting their plans up and running. As plan assets grow, so too do sponsor needs, not only to manage the plan but participants and costs as well. When we’re talking about the biggest plans, it’s more about accountability to stakeholders, and keeping the plan and participants on track,” said John Meunier, a principal at Cogent. 

© RIJ Publishing. All rights reserved.

French Retirement Age May Rise to 62

Posted on June 22, 2010 by -

France’s statutory retirement age is set to increase gradually from 60 to 62 by 2018 under proposals outlined by Labour minister Éric Woerth, IPE.com reported. Life expectancy had increased by three years since 1980, when the current retirement age had been agreed, Woerth said.

Despite the announcement, all proposals still have to be agreed by Parliament, which is expected to address the issue in September.

The move is expected to allow the government to save €18bn, or about $27 billion, and combat a growing pensions deficit. Woerth said these savings could not have been achieved simply by increasing the contribution period.

“All other things equal, this should increase the size of ERAFP and also further improve its solvency, which is already satisfactory,” said Philippe Desfossés, chief executive of ERAFP, the French civil service supplementary pension scheme. “However, these changes will occur only gradually, and it remains to be seen whether the actual retirement age will increase as much as the legal one.”

Without changes the retirement age, France’s state pension deficit was expected to hit between €72bn and €115bn by 2050 in calculations made by the Conseil d’orientation des retraites (COR), the country’s leading pension advisory body.

The reforms will go hand in hand with an already implemented increase in minimum contribution period. Currently, at 40.5 years, it is set to increase to 41.5 by 2020.

COR had previously suggested that, without reforms, the minimum contribution period would have to be increased to 43.5 years by 2050 if pensioners wished to continue relieving a full pension.

© 2010 RIJ Publishing. All rights reserved.

Lincoln Financial to Repay U.S. Treasury Investment

Posted on June 22, 2010 by -

To repurchase the $950 million in preferred shares it issued to the U.S. Treasury under the Treasury’s Capital Purchase Program (CPP), Lincoln Financial Group is selling $335 million worth of common stock and up to $750 million of senior notes. The public offering was announced June 14.

Lincoln intends to repurchase the $950 million of preferred shares with the proceeds of the common stock offering, $250 million from the bond offering, and cash on hand. The additional $500 from the sale of debt will be used to support universal life reserves of Lincoln Financial’s insurance subsidiaries.

“We ended the year in a strong capital position, and our first quarter results reflected the strength of our business model,” said Dennis R. Glass, president and CEO of Lincoln Financial. “The repurchase of the CPP preferred shares combined with securing long term financing for a portion of our life insurance reserves completes a series of capital initiatives in support of our strong ratings and gives us additional financial flexibility as we look to invest in our core businesses.”

The U.S. Treasury will continue to hold warrants to purchase approximately 13 million shares of Lincoln Financial’s common stock at an exercise price of $10.92 per share. The company does not intend to repurchase the warrants.

J.P. Morgan will serve as Global Coordinator for the offerings. Credit Suisse, Morgan Stanley and Wells Fargo Securities will act as joint book-running managers for the equity offering and BofA Merrill Lynch, Deutsche Bank Securities and US Bancorp will act as joint book-running managers for the debt offering. The underwriters have a 30-day option to buy up to an additional 15% of the offered amount of common stock from the company.

 

© 2010 RIJ Publishing. All rights reserved. 

With BP Investments, Pensions Win or Lose

Posted on June 22, 2010 by -

The New York State Common Retirement Fund, one of the largest pension funds in the US, is looking into the possibility of filing a class action lawsuit against BP for recklessness, Pensions & Investments reported.

Robert Whalen, spokesman for state Comptroller Thomas DiNapoli, said: “We’ve been looking at all the options we have available, including potential litigation. We want to make sure if there was negligence or recklessness we are made whole appropriately,” according to a Wall Street Journal report.

New York officials have estimated BP’s plummeting share price has cost the $133 billion state pension fund more than $30 million since one of the oil giant’s offshore drilling rigs in the Gulf of Mexico exploded on 20 April. The New York State Common Retirement fund currently owns more than 17.5 million BP shares.

Meanwhile, New Jersey’s $68.9 billion public pension fund earned a $5.5 million profit from its investment in BP plc, selling about half of its holdings before an April 20 explosion at the British oil giant’s offshore well in the Gulf of Mexico caused a massive and continuing oil spill.

The New Jersey Department of Treasury’s Division of Investment, Trenton, which manages investments for seven public retirements systems within the state pension fund, began selling BP shares in early January and completely ended its ownership of BP stock by May 11, a department spokesman said.

New Jersey’s pension system bought BP shares over several years, ending in September 2009. With a cost basis of just under $460 million and total share sales amounting to about $465 million, the pension system earned about $5.5 million.

“We felt oil prices would be volatile or would fall,” a spokesman said. “We felt BP had reached a peak and that it was time to cash in some of our gains.”

After its last BP stock purchase in September 2009, the pension system held 51.94 million shares of BP that were traded on the London Stock Exchange and whose share price differs from the price of the company’s American depositary shares traded on the New York Stock Exchange.

Between mid-January and April 9, New Jersey had sold about half of its shares. It sold the rest of the shares at several times after the oil well explosion. The New Jersey state pension fund still owns $45 million in BP corporate bonds.

© 2010 RIJ Publishing. All rights reserved. 

The Year of Living Less Dangerously

Posted on June 16, 2010 by -

Over the past year, major variable annuity issuers have been busy making their contracts and contract riders less vulnerable to the kind of shocks they suffered from falling share prices and rising hedging costs.  

Here’s a look at nine of the past year’s noteworthy product developments from top-15 issuers, many of whom tried to make a virtue of necessity by incorporating designs that reduce the product’s risks while also responding to the demands of various types of clients and intermediaries. They include:

  • Allianz Life Retirement Pro
  • AXA Equitable Protected Capital Strategies
  • ING Select Opportunities
  • Nationwide Destination DV
  • Jackson National LifeGuard Freedom Net 6
  • MetLife Growth and Guaranteed Income
  • Hartford Life Personal Retirement Manager
  • AXA Equitable Retirement Cornerstone Series
  • John Hancock AnnuityNote

Not all of these nine contracts or contract revisions have been approved or come to market yet. The first four are new this spring. The rest were reported in Retirement Income Journal at various times in the past year.

Allianz Life Retirement Pro

The soon-to-be-released Retirement Pro from Allianz Life has two investment sleeves, which places it in the same innovative category as the Axa Cornerstone and The Hartford Personal Retirement Manager two-tier contracts, both recently introduced.

In the Allianz Life product, the client’s riskiest assets go into one sleeve, called the Base Account, which has a wide range of investment options. Its value is not guaranteed. Less risky assets go into the Income Advantage Account. It offers limited investment options, but the client can apply a guaranteed lifetime withdrawal benefit and a death benefit to it.

Retirement Pro is aimed at clients of fee-based investment advisors who hold security and insurance licenses. It has no distribution charge. Clients can apparently move money back and forth between the accumulation account and the guaranteed account before taking income.

There’s a 30-basis point charge on investments in the Base Account. The maximum annual expense ratio on the Income Advantage Account will be 1.75%, but the current charge has not been established yet.

The contract has an unusual, inflation-sensitive payout formula. Instead of corresponding to the age of the annuitant at the time of the first income payment, payout rates depend on the 10-year Treasury yield. The payout rates are currently 4%, 5%, 6% or 7%, depending on whether prevailing 10-year Treasury yield is 3.49% or less, 3.5% to 4.99%, 5% to 6.49%, or 6.5% and above.

Investment options include funds managed by AIM, Allianz Fund of Funds, BlackRock, Columbia, Davis, Dreyfus, Eaton Vance, Franklin Templeton, Gateway, Invesco, JPMorgan, MFS, Oppenheimer Capital, PIMCO, Schroeder, Turner and Van Kampen. Not all investments are available in the Income Advantage Account.

Axa Equitable Protected Capital Strategies

This contract from Axa Equitable, which has not come to market yet, gives its contract owners exposure to the performance of securities and commodities indices. The owners do not invest in index mutual funds, however.

Instead, contract owners invest in “Segments” with durations of one, three and five years. Each segment is invested in either the S&P 500 Price Return Index, the Russell 2000 Price Return Index, the MSCI EAFE Price Return Index, and, for IRA contracts only, the London Gold Market Fixing Ltd PM Fix Price /USD and NYMEX West Texas Intermediate Crude Oil Generic Front-Month Futures.  The equity indices do not include any dividends paid by the companies in the index.

Each Segment has a target cumulative return that Axa expects it to reach at the end of its duration. The investor’s return is capped at the target; the issuer keeps any outperformance. At the same time, each Segment offers one or more “buffers” of either    -10%, -20% or -30%. The investor can only lose the amount by which the segment’s losses exceed the buffer amount by the end of its duration. Investors don’t know until they choose a segment what the cap on the cumulative return will be.

The durations of the MSCI EAFE Price Return Index, the oil index, and the gold index segments are only one year and a buffer of only -10%.  The contract also offers three variable investment options, a bond index fund, a S&P 500 index fund and a money market fund, which are not treated like the segments.

There’s a B-share version of the contract that charges an annual M&E fee of 1.25% and has a five-year surrender period with an initial charge of 5%. There’s also an ADV version for fee-based advisors that charges 80 basis points per year and has no surrender period. The contract has a $25,000 minimum. The investment management fees are incorporated in the unit value of the segments.  not specified in the available version of the prospectus filing.

The contract assets, or at least the assets in the segments, is intended to be converted to a fixed or variable annuity contract that provides income for life or life with a period certain. The unusual nature of this contract makes it difficult to determine exactly how it works, at least until it is approved and Axa can discuss it.

ING Select Opportunities

The payout formula in the guaranteed lifetime withdrawal benefit of ING’s low-cost, limited-investment option Select Opportunities contract, introduced in March, seems to reward contract owners for buying their annuities early. The contract encourages income deferral without offering a roll-up.

For instance, three owners might all convert their assets to lifetime income at age 71. But one might receive a payout rate of 3.5%, another of 4.5% and the third of 5.5%. Owners who bought their contracts less than five years before taking income get the low rate, those who bought five to 10 years before get the middle rate, and those who bought their contracts at least 10 years before taking income got the higher rate.

A few years ago, an investor could have gotten a 5.5% payout at age 71 without any wait. So where’s the upside? Liquidity (a four-year, 6% surrender period) and low costs. The current mortality & expense risk ratio is only 75 basis points, there’s a Minimum Guaranteed Withdrawal Benefit fee of 100 basis points, and investment fees are just 51 to 83 basis points. (The M&E fee and the rider fee are subject to future increases.)

Advisors who fancy the idea of gaming the income guarantee with a high-growth strategy aren’t likely to favor Select Opportunities. Contract owners must put at least 40% (30% temporarily) into a bond index fund or money market fund, and no more than 10% into international equities (Dow Jones Euro STOXX 50 Index or an international index fund). For the balance of their assets, there are just four Russell stock index funds and an ING stock index fund.  

Nationwide Destination DV

This extension of Nationwide’s Destination contract series offers a 10% simple roll-up during a 10-year deferral period (5% in New York) so that a contract owner could at least double his or her income base after waiting ten years for the first withdrawal. At the stipulated 5% payout rate, a 60-year-old who invested $100,000 would receive at least $10,000 a year for life starting at age 70. 

The contract offers a wide range of funds from the following providers: Alliance Bernstein, American Century, BlackRock, Dreyfus, Fidelity, Franklin Templeton, Invesco, Ivy, Janus Aspen, MFS, Nationwide, Neuberger Berman, Oppenheimer, PIMCO, T. Rowe Price, Van Eyck, Wells Fargo. The lifetime income benefit option brings certain investment restrictions, however.

It’s an expensive, B-share contract. There’s a seven-year surrender charge period starting at 8%. The M&E fee is 1.60% and the administration charge is 0.20%. When you add a death benefit option, the living benefit (1.00% single, 1.20% joint) and fund fees of 45 to 194 basis points, fees could easily reduce the account value each year by more than 3.50%.

This contract pays out 5% of the benefit base starting at age 65, and doesn’t offer 6% until age 81. The payout rate for those who begin taking income between ages 45 and 59½ is 3%. For those ages 59½ through 64, the rate is 4%.  

Jackson National LifeGuard Freedom 6 Net

In May, Jackson National Life introduced a guaranteed lifetime income benefit rider for advisors and clients who expect tax rates and equity markets to rise. Called LifeGuard Freedom 6 Net, it allows owners of a Jackson National Perspective II variable annuity to potentially take a two-tiered withdrawal from their contract each year during the product’s income phase.

The first tier of the withdrawal is the one usually associated with GMWB—a percentage of the guaranteed income base that Jackson National calls the GAWA or guaranteed annual withdrawal amount. Depending on the client’s age when income begins, that would mean a withdrawal of 4% to 7% of the premium, adjusted up (for to lock in market gains) or down (for excess withdrawals).

The second tier of the withdrawal is called the Earnings-Sensitive Adjustment. It equals 40% of the net gains in the account each year, if any, but not more than two-thirds of something called the Maximum Eligible Withdrawal Amount Remaining (MEWAR), which starts out as the same as the GAWA but may change over time.

“Let’s say that your contract value increases to $120,000 in the first year,” she explained. “With most available withdrawal benefits a person in the highest income tax bracket would take out five percent, or $6,000, and net about $3,600 after taxes. With Freedom Net 6, you take out $10,000″—$6,000 plus the MEWAR of two-thirds of $6,000—”and net $6,000 after taxes,” said Alison Reed, Jackson National’s vice president, product management, variable annuities.

Under the same contract, the owner can receive a 6% roll-up in the income base for each year he delays withdrawals. If he delays 10 years, the income base is automatically at least double the original premium.  

MetLife Growth and Guaranteed Income

Last November, Fidelity Investments has replaced its successful Fidelity Growth and Guaranteed Income variable annuity with a new contract that’s similar in name, less risky to the company, a bit more expensive for investors and has a different underwriter: MetLife. 

Now called MetLife Growth and Guaranteed Income, the product will be sold exclusively through Fidelity, which markets no-load mutual funds and other financial products and services directly to investors. Fidelity also sells MetLife fixed annuities and single-premium immediate annuities.

FGGI was “one of the most successful product launches Fidelity has ever had,” said Joan Bloom, senior vice president at Fidelity Investments. But after the financial crisis its living benefit guarantees became too expensive for FILI, Fidelity’s relatively small captive life insurer, to keep underwriting.

So far, the product has done well. Of the top 50 best-selling variable annuity contracts in the first quarter of 2010, it ranked 37th, with $197 million in sales. It was also among the top five contracts in the regional broker-dealer channel, ranking fourth.

Hartford Life Personal Retirement Manager

Last fall, Hartford Life launched its Personal Retirement Manager, which the Simsbury, CT insurer calls “a way to combine long-term investment growth and guaranteed lifetime income potential in a single, user-friendly, tax-deferred retirement planning vehicle.”

The Personal Retirement Manager is like Neapolitan ice cream: it’s three flavors in one. Contract owners can allocate their assets bucket-style among mutual funds in a variable account, a fixed return account, and a “Personal Pension Account” or PPA that’s actually a deferred income annuity.

There’s also a process baked into the product. It lets retirees gradually transfer money ($10,000 initial minimum) whenever appropriate from their variable and fixed accounts into the PPA—perhaps between ages 60 and 70—before turning on lifetime income. 

“For years, everybody knew that if you wanted income, the SPIA was the most efficient way to deliver it,” said John Diehl, CFP, senior vice president with The Hartford’s Investment & Retirement Division.

“So we looked at the basic concept of the SPIA, and we looked at the reasons those products don’t sell, including the fact that the advisor loses track of the assets. We thought that if we offset that, we could get a more successful product than a SPIA and a cheaper, more effective product than a GLWB.”

AXA Equitable Retirement Cornerstone Series

Introduced last January, the Cornerstone Series is designed to give investors a way to benefit from the interest rate increases that, to many financial prognosticators, seem inevitable. And if rates do go up, it could give them a higher roll-up and higher payout rate than the five percent currently offered by competitors.

“In times of historically low interest rates, we’re giving clients an opportunity to benefit from rising rates. They can let their benefit base grow by 10-year Treasury rates plus one percent or withdraw at 10-year Treasury plus one percent,” said Steve Mabry, senior vice president of annuity product development. The current rate for the product, which has been rolled out through AXA Equitable career agents but not third-party distributors, is rounded to 5%, based on a 3.8% 10-year Treasury rate.    

The contract contains two buckets or “sleeves.” The first sleeve is a traditional variable annuity separate account with some 90 investment options, ranging from cheap index funds to aggressive actively managed growth funds.

The second sleeve is also a separate account, but its value is protected by a living benefit rider that provides a roll-up and a guaranteed lifetime income benefit. Both the roll-up and payout rates are linked to the 10-year Treasury rate. The client pays a rider fee only on the assets (or rather, on the benefit base achieved by the assets) in the second sleeve.

On each contract anniversary during the accumulation period, the guaranteed benefit base—the sum of contributions to the second sleeve minus withdrawals—automatically compounds at a rate equal to about one percent over the prevailing 10-year Treasury rate, but no less than four percent and no more than eight percent. Every three years, the value of the benefit base is also ratcheted up to the market value of the assets in the sleeve, if it’s higher.

John Hancock AnnuityNote

In the post-crisis summer of 2009, John Hancock, the U.S. unit of Canada’s Manulife Financial, launched an A-share variable annuity with a simplified lifetime income guarantee. The company hoped it would appeal to a broad swath of retirement-bound Boomers ages 55 to 75. But so far it has not gotten much traction in the marketplace. This spring, John Hancock filed a prospectus for a C-share version of AnnuityNote. The A-share AnnuityNote charges as one-time 3% front-end load. C-share contracts typically have no front-end load or surrender period but have higher ongoing M&E fees than A or B shares.

© 2010 RIJ Publishing. All rights reserved.

Our First Annual VA Special Editions

Posted on June 16, 2010 by -

We’re devoting the bulk of this week’s and next week’s issues of Retirement Income Journal to the variable annuity market. This week, we focus on the latest products and sales trends. Next week, we’ll delve into some of the issues that cloud the variable annuity industry’s future.  

Later, we’ll combine all of the articles and data in a microsite within our website, to serve as an ongoing resource for annuity manufacturers, advisors and others who have an interest in this product category. Each year, we’ll conduct an industry review.

The VA industry is searching for new directions, new markets and new story lines. The confidence that the industry used to draw from bull markets has largely been missing in the past year, despite the re-inflation of equity prices. Some companies are enjoying immense sales, but even they would prefer to see the whole industry thrive.   

The future may yet belong to variable annuities or to their income guarantees. Five years from now, millions of plan participants might routinely add a guaranteed lifetime withdrawal benefit (or “stand alone living benefit”) to their 401(k) assets, and millions of new retirees might rollover their defined contribution money to a variable annuity in an IRA.

Or maybe not. The variable annuity with a GLWB might become a niche product or perhaps even a relic, as quaint as a Hummer or a video camera that’s so big and bulky you have to rest it on your shoulder. It will depend in part on the economy, both domestic and global. It may also depend on which political party controls Congress, or on who runs the Department of Labor.

The survivability of a particular product is not the most important goal, however. The important thing, at least for those who have a stake in perpetuating the success of insurance companies, is to adapt to circumstance, to continually improve, and to keep all eyes on the prize: designing and marketing tools that help the Baby Boom generation manage its financial risks in retirement.   

© 2010 RIJ Publishing. All rights reserved.

Loaded VAs Haven’t Lost Their Lustre

Posted on June 16, 2010 by -

The best-selling variable annuity contracts in the first quarter of 2010 were not the simple, inexpensive, low-in-saturated-fats products that some people thought would emerge victorious from the financial crisis, like tiny mammals succeeding the dinosaurs.        

No, four of the most popular contracts (TIAA-CREF’s giant group annuity doesn’t really count) were robust, all-purpose retirement vehicles with lots of investment choices, payout options, premium bonuses and incentives for delaying withdrawals, i.e., roll-ups. They bore a close resemblance to their pre-crisis personas.

As for costs, well, when you buy an all-terrain SUV with a V-8 engine, fuel economy isn’t your primary concern. These contracts are designed to get you where you want to go, wherever that may be. They are also designed to win the loyalty of independent advisors, the most fertile channel for VA issuers that market through third parties.

But enough with the mixed metaphors.

The top four individual VA contracts were Jackson National’s Perspective II and Perspective L-share (in the #2 and #4 positions) and Prudential Financial’s APEX II and XTra Credit Six (in the #3 and #5 spots). These four accounted for about $4.9 billion sales or over 15.5% of all sales for the quarter.

Two of the executives who are responsible for the success of these products—Bruce Ferris, senior vice president at Prudential Annuities, and Greg Cicotte, executive vice president and national sales manager at Jackson National—spoke with RIJ about their recent success.   

For Prudential, more producers 

Ferris attributed his sales numbers to the number of boots on the ground. “I don’t think it’s any particular product type that’s driving our success in the market place,” he said, attributing growth in part to the addition of 23,000 new producers. “That’s the highest number we’ve had by more than double.”

Producers have apparently never been so willing to sell Prudential annuities. “We asked people who sold our product if they were likely to sell our products in the future, and 85% said they were highly or very likely to do more business with Prudential. That’s our highest number ever,” he said.

But why do they like Prudential? In part, it has to be the appeal of the Highest Daily 6 roll-up, which ensures that benefit base is never lower than the account value, and goes up by at least six percent a year. (Pre-crisis and pre-derisking, Prudential’s annual deferral bonus was seven percent.)

“The S&P 500 was down 7.99% in May, which is a testament to the volatility of the markets,” Ferris explained. “Anybody who bought our product on, say, April 23rd, can look at their account and see that the value has not only not gone down, it has gone up. That’s why we’re seeing continued interest. I’m not rooting for a down market. I’m saying that our product lets people set aside their fears and emotions. That’s our whole focus.”

Prudential’s big VA differentiator is the automatic asset transfer device that protects the guarantee by moving money into bonds when equity prices fall, and vice-versa. This technique, which reverses what advisors prefer to do, successfully limited Prudential VA owners’ losses in 2008-2009 to an average of 18%, or about half the typical losses.

“Before the market went down 40%, we heard from a lot of advisors that they didn’t like the automatic rebalancing or asset transfer because you buy high and sell low,” Ferris said.

“But once they were dealing with the aftermath of the crisis, they said, I don’t want to lose anymore. They said, How do I grow it back, and then go beyond that? We don’t have a magic solution, but our method protects people in a down market. You want to end up with the biggest pile of assets to draw income off of, and that’s what we help people do.”

“We’re fortunate to be in a leadership position right now,” he said. “Our value proposition, which maximizes retirement income, is resonating with more and more people. But I’m not declaring any victories. This is a marathon, not a sprint. We need our competitors to be successful, and this industry isn’t growing. So I’m rooting for my competitors.”

Jackson touts laissez-faire 

The approach to variable annuities is very different at Jackson National, which is owned by Britain’s Prudential plc (no relation to Prudential Financial) and based in East Lansing, Michigan and Denver. Jackson National folks like to emphasis that they’ve maintained a quiet consistency with regard to product and price for some time.

“We’ve had the number one product in the independent channel for seven years in a row. This hasn’t just happened in the past year,” said Greg Cicotte, executive vice president and national sales manager at Jackson National. “Perspective II had been number one in the bank channel, and now it’s being embraced in other channels.”

Jackson National and Prudential compete for the attention of the same advisors, but Jackson puts a bigger emphasis on freedom, eschewing Prudential’s asset transfer method, Cicotte told RIJ. The addition of American Funds to Perspective’s lineup has also helped sales. The company expects a new feature, LifeGuard Freedom 6 Net, which raises payouts to stabilize monthly income in the face of higher income taxes, to catch on with high net worth clients.  

“We’re out there in the same channels [as Prudential], but from a product standpoint our philosophies are very different,” he said. “There are two distinct choices for an advisor. Prudential has the [asset transfer] algorithm and we sell complete investment freedom. We don’t get in between the advisor and the investments. We allow them to customize. This approach appeals to advisors who pride themselves on doing business with high-end, sophisticated advisors, and they appreciate it.

“We believe that the VA with a GLWB is a wonderful place for an individual to reenter the market and grow back their money. The investment freedom we offer allows people to be in the market and to take on more risk, it lets them go heavier in equities.

“You’re not going to see us compete on price,” Cicotte said. “The product provides the choices, but it is also priced appropriately for the shareholders. One reason we’re enjoying the success we have is that the financial crisis put advisors in a position to seek out the stronger providers. So we’ve benefited from a flight to quality. We always priced appropriately and hedged appropriately. We were charging a higher rate than other companies for the living benefit before the crisis and the prices we’re charging today are not different. And we haven’t had to lay off wholesalers.”

Jackson National also has a diverse product spectrum that provides a natural buffer against risk, which makes financial strength one of its wholesalers key talking-points. “Two and a half years ago, when there were so many living benefits, the tendency of wholesalers was just to talk living benefits,” Cicotte said. “Post-crisis, the conversation has changed. Now advisors want to hear about the stability of the company, about our hedging capabilities. That’s a conversation that the wholesalers have to be able to have today.”

© 2010 RIJ Publishing. All rights reserved.

Why Do Educated People Live Longer?

Posted on June 16, 2010 by -

The mortality gap between males with and without a college degree has risen 21 percentage points from 1971 to 2000, so that by the last turn of the century college-educated 25-year-olds could expect to live seven longer than their peers with less schooling.

In a new research paper, “Explaining the Rise in Educational Gradients in Mortality,” David Cutler and Ellen Meara of Harvard, Fabian Lange of Yale, Seth Richards of Penn and Christopher Ruhm of the University of North Carolina at Greensboro, try to explain the gap. 

Even after controlling for smoking and body weight, the college-educated have lower expected mortality rates than their less educated peers. The authors estimate that differential changes in smoking and obesity would have led to a 4 or 5 point decrease, not 21 percentage points. For women, patterns of smoking and obesity only can explain approximately 3 points out of the 42 percentage-point increase.

One possible explanation was that the highly educated have better access to medical care and better adherence rates to prescribed regimes. Another is that environmental and geographically based risks may have declined more over time for the highly educated.

Although they weren’t sure why, the authors thought that even the complete elimination of disparities in behavioral risks across education groups would be unlikely to do away with education-differentials in mortality. A summary of the study did not mention the well-established association between education, wealth and longevity, or whether that association has strengthened over the past several decades.    

© 2010 RIJ Publishing. All rights reserved.

ING Launches Registered Indexed Annuities

Posted on June 16, 2010 by -

ING has introduced Select Multi-Index 5 and ING Select Multi-Index 7, two registered modified single-premium fixed deferred annuities whose fixed-rate returns are potentially enhanced by linkage to the performance of up to four market indices.

The indices are the S&P 500 Index, S&P MidCap 400 Index, Russell 2000 Index, and EURO STOXX 50 Index as well as a fixed-rate strategy. Investors are not invested directly in these indexes.

“Offering registered fixed index annuities gives us products that we can make available to many banks and full-service brokerage firms, which are looking for more conservative solutions for their clients in this challenging environment,” said Lynne Ford, CEO of ING Financial Solutions.

In late 2009, ING’s U.S. operations merged its annuity and rollover businesses into a new business unit called ING Financial Solutions. ING Select Multi-Index 5 and ING Select Multi-Index 7 were developed as part of a suite of simpler retirement solutions began rolling out earlier this year.

Since then, several new solutions-oriented products, including a multi-manager mutual fund custodial IRA account, a registered fixed annuity, and a lower-cost variable annuity, have been introduced.

ING will still continue to offer non-registered fixed index annuities issued by INGUSA Annuity and Life Insurance Company and ReliaStar Life Insurance Company of New York. 

© 2010 RIJ Publishing. All rights reserved.

Vanguard Now Offers a Dozen TDFs

Posted on June 16, 2010 by -

Vanguard in the third quarter will introduce its latest target-date fund offering, aimed at investors between ages 18 and 22, confirmed spokesman Joshua Grandy, Pensions & Investments reported. 

The 2055 fund will initially have 72% in Vanguard’s Total Stock Market Index fund; 8.8% in its European Stock Index fund; 4.8% in the Vanguard Pacific Stock Index fund and 4.4% in the Vanguard Emerging Markets Stock Index fund. The remaining 10% will be in the Vanguard Total Bond Market II Index fund.

The Vanguard Target Retirement 2055 Fund will be the 12th in Vanguard’s lineup, which has garnered $41 billion in net flows over the past three years.

© 2010 RIJ Publishing. All rights reserved.

Montana Senator Nixes 401(k) Fee Disclosure

Posted on June 16, 2010 by -

Last week, Sen. Max Baucus proposed changes to the American Jobs and Closing Tax Loopholes Act (H.R. 4213), which the House approved May 28, that would eliminate the requirement that 401(k)-type plans disclose all fees that participants pay.  

 U.S. Rep. George Miller (D-CA), the chair of the House Education and Labor Committee, said that the proposed elimination of fee disclosure requirements was “unacceptable.”  

Federal law does not require the disclosure of fees taken out of workers’ 401(k)-style accounts. The Government Accountability Office found that a one-percentage point difference in fees could cut retirement assets by nearly 20 percent.

Provisions regarding fee-disclosure were based on the 401(k) Fair Disclosure and Pension Security Act, authored by Miller and approved by the Education and Labor Committee last year. Miller’s original bill, which he said would save participants $2 billion, would:

  • Help workers understand investment options by providing basic investment disclosures, including information on risk, return, and investment objectives.
  • Require workers’ quarterly statements to list total contributions, earnings, closing account balance, net return, and all fees subtracted from the account.
  • Give workers the name, risk level, and investment objective of each available investment option before enrolling in a 401(k) plan.
  • Require disclosure of fees for each investment option the employee invests, expressed in dollars or as a percentage.
  • Require 401(k) service providers to disclose to employers all fees assessed against the participant’s account, broken down into three categories: plan administration and recordkeeping fees, investment management fees, and all other fees.
  • Require the U.S. Department of Labor to review compliance with new disclosure requirements and impose penalties for violations.
  • Adjust funding requirements so plan sponsors will not have to choose between making forced cash contributions, freezing plans or cutting jobs.
  • Adjust the amount of time a plan can make up losses over time and relief on funding-level restrictions, among other provisions.

© 2010 RIJ Publishing. All rights reserved.

Bernanke Cites Fiscal Impact of Aging

Posted on June 16, 2010 by -

Federal Reserve Board Chairman Ben Bernanke addressed the House Committee on the Budget on June 9 regarding economic and financial conditions and the federal budget. Despite improvements in the past year, he said, the long-term outlook is clouded by the aging of the Baby Boom generation. Here’s an excerpt from Bernanke’s remarks:

Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession. The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the necessary policy actions taken to ease the recession and steady financial markets. As the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out, the budget deficit should narrow over the next few years.

Even after economic and financial conditions have returned to normal, however, in the absence of further policy actions, the federal budget appears to be on an unsustainable path. A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time.

Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits.

Notably, this year about five individuals are between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, this ratio is projected to have declined to around 3. In addition, government expenditures on health care for both retirees and non-retirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes.

To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.

© 2010 RIJ Publishing. All rights reserved.

For VAs, Roll-Ups Rule

Posted on June 16, 2010 by -

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.

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. 

© 2010 RIJ Publishing. All rights reserved.