Consumers in the US are increasingly turning to variable annuities as part of a shift towards more predictable income streams, according to an analysis of the market undertaken by Life Insurance International (LII)
At a time when Americans are less confident than ever before in their ability to meet retirement goals, figures from professional development organisation LIMRA reveal that total 2011 variable annuity (VA) sales in the US grew to $159.3bn, a 13% increase from 2010.
This increase comes as writers continue to manage the risks on the living benefit riders they offer on variable annuities, according to LIMRA.
A VA is an insurance contract, in which at the end of the accumulation stage, the insurance company guarantees a minimum payment.
The remaining income payments can vary depending on the performance of the managed portfolio.
Life benefit riders
Joseph Montminy, assistant vice president of annuity research at LIMRA, explains that guaranteed life benefit riders are driving growth in the VA market.
“When you look at new VA sales, in 2011, 89% of all VA products out there had a rider available, and when you look at election, 88% were elected, with 9 out of 10 electing the guaranteed life withdrawal benefit rider, which gives the individual guaranteed income payments at some time, for the rest of their life,” he says.
LIMRA’s research underlines that riders are continuing to fuel the US markets for variable annuities as consumers seek to cushion themselves against the volatility of the equity markets.
Among the most popular of living benefit riders on variable annuities is the guaranteed lifetime withdrawal benefit (GLWB).
GLWBs are a guarantee on the promise of a certain percentage, typically about 5%, of a guaranteed benefit base that could be withdrawn each year for the life of the contract holder, regardless of market performance or the actual account balance.
The low interest rate environment in the US has challenged insurers to manage guarantees, and has slightly slowed the torrid pace of the first half of 2011. Fourth-quarter 2011 sales were flat year on year, and compared to the third quarter of 2011, sales dropped 4% to $38.4bn.
Individual variable annuity sales 2005-2011
A notable trend in the VA market is that amid sharply erratic equity markets, some
VA writers have cut policyholder benefits to reduce their own financial exposure.
Other insurers have begun linking fees and rider features to changes in the markets, using asset-allocation models that automatically switch money between stocks and bonds when certain triggers are met, and offering volatility-managed programmes on the separate account level to better respond to the interest rate environment.
Bob Kerzner, president and CEO of LIMRA, says: “In terms of product development, companies are having to rethink guarantees, even as guarantees have become the go-to tool in VAs.
“In 2011, sales were remarkably good, but certainly dampened by the changes in guarantees that were an outcome of the interest rate environment. So we see some retrenching, but guarantees are driving the VA business and will continue to attract investors.”
Some insurers are also readjusting their VA business to better manage the interest rate environment.
In his 2011 annual report message to shareholders, MetLife chairman, president and CEO Steven A Kandarian, said the company has re-priced its leading variable annuity product and plans to reduce the firm’s VA sales to roughly $18bn in 2012.
MetLife is the leading seller of variable annuities in the US, with 2011 sales of $28.4bn, according to LIMRA.
The reason that providers are under pressure is because VA carriers are guaranteeing
that an annuity will accumulate at a certain rate.
However, with market volatility, the price of that guarantee increases as the risk is higher.
What’s worse, because the guarantees promise a fixed sum at a specific date in the future, the value of a future payment is higher when rates are lower.
To ease some of the interest rate pain, carriers are cutting back on the guarantees offered.
Late in 2011, MetLife late lowered the roll-up on its guaranteed minimum income benefit to 5%, from 5.5% previously.
Meanwhile, in January, SunAmerica lowered the benefit payment rate on its Polaris variable annuities from 5.5% to 4% for singles up to the age of 64, and from 5.5% to 5% for people over 65.
The Hartford has taken the most dramatic step to date, placing its US individual annuity business into run-off and pursuing a sale or other strategic alternative for its individual life insurance and retirement plans businesses.
With so many firms trimming their annuities business, the market is now more concentrated than ever: in 2007, 45% of the VA market share was held by the top five companies.
Today, LIMRA data shows that the top five hold 61%, and most of the players are different.
As of the end of 2011, MetLife, Prudential, and Jackson National Life held the top three spots in terms of sales. In 2007, AIG, MetLife and AXA Equitable were at the top of the leader board, followed closely by The Hartford.
Interest rate issues aside, a study released by AllianceBernstein and the Insured Retirement Institute (IRI) in April 2012 found that more financial advisers are turning to Vas as a portfolio solution because they pro- vide guaranteed income and can help clients attain financial security in retirement.
For example, the study said 60% of sellers have increased their recommendations for variable annuities since the credit crisis.
Meanwhile, 42% bring up VAs in “every conversation” with clients and see them as an important part of financial planning solutions.
Kerzner says: “The demographics of the United States are undeniable, and VAs are the industry’s way of capturing the momentum.”
He adds: “Two-thirds of Americans know that they have not saved enough for retirement, and you have this huge bulging segment of the market, but they’re also very mindful of what happened in 2008, so the VA is an ideal product to respond to both emotions.”
Steve Wiesbart, vice president and chief economist of the Life Insurance Institute, notes that the ‘greying’ of the US market is ideal for annuity sales.
“The life industry is doing a fairly good job of repositioning itself as a financial planning business, and VAs are a huge part of the equation,” he says.
“Dreams die hard, but consumers are realizing that the get-rich-quick days are over and it’s time to reorient around retirement management. Giving retirees greater options around retirement would be a huge boon for the industry and fight a real societal issue, one that will plague this generation more so than any other.”
Individual variable annuity sales forecast to 2015
The most compelling finding from the study by AllianceBernstein and the IRI is that VA success has historically gone hand in- hand with the general success of a financial adviser.
It said that top VA sellers appeared to be more successful than advisers who did less VA business. Sellers were almost twice as likely as the other two groups to have assets under management of more than $100m.
This development comes at a time when many advisers have been adopting a multidimensional
model, in which they and the client commit to a long-term investing strategy tailored to the client’s financial circumstances, risk tolerance and objectives.
Under this approach, the adviser and client first identify the appropriate mix of stocks and bonds.
The adviser then steers the discussion to retirement-income security, where VAs become an added dimension within the asset-allocation decision.
The study by AllianceBernstein and IRI said: “As our research shows, VAs play an important part in the retirement-income dialogue.
“They’re not a silver-bullet solution, and they’re not right for every client. But they can broaden advisors’ solution sets, giving them more tools with which to guide their clients to better outcomes and bolster clients’ confidence in their retirement plans.”
Montminy says that VA producers continue to innovate and to react to the interest rate environment, working to smooth out some of the kinks on the upside of the investments underlying the products.
One area to watch, he says, is the development of VAs built on target volatility asset allocation, which seeks, in its simplest form, to adjust equity exposures in favour of bonds or cash during high-volatility periods and the reverse in relatively low-volatility times.
For example, Nationwide Financial Services recently announced that its advisers will have access to actively managed target volatility funds for both variable life insurance and annuity products.
Montminy says: “Carriers are managing volatility and cost, using target volatility funds and sophisticated asset allocation algorithms to lower some of the fluctuations on the consumer side.
“It does have a little impact on the upside, but protection on the downside is the key these days. The VA is really being viewed by consumers as an insurance policy for income, as people are using IRA rollovers through 401Ks and IRA, and turning qualified money into guaranteed income and death benefits.”
Variable annuities are certainly experiencing a ‘renaissance’ in the current economic climate, but only four years ago, LII highlighted a study showing that advisers were reluctant to recommend annuities to their clients.
The study was conducted by Spectrem Group for Ameritas Advisor Services, a unit of insurer Ameritas Life. Spectrem found that even before the equity market meltdown, 70% of advisers were concerned about locking their clients into annuities and would prefer other long-term retirement products.
To combat that adviser resistance, LII said some annuity providers were creating products that charge lower fees. For example, it was noted that Ameritas started offering a VA in 2007 without any withdrawal charges or sales commissions