5 Reasons Variable Annuities Look Prettier

Q3 earnings season perspective

(Photo: USFW) (Photo: USFW)

Something amazing happened this fall when U.S. life insurers released their third-quarter earnings: A few executives bragged about variable annuity product results.

A few years back, prolonged low interest rates made what once looked like cruelly skimpy benefits guarantees seem like promises of caviar and fine champagne. Many issuers treated their variable annuity units like dandelions in a rose garden.

This year, executives talk nervously about their (thankfully) closed blocks of variable annuity business. But others are talking about their surviving variable annuity operations' welcome contributions to earnings.

 (Related: Variable Annuities, Death Benefits and the Uninsurable Estate Owner

At Prudential Financial Inc., for example, executives said a 4% increase in variable annuity average separate account values helped increase revenue from policy charges and fee income.

Lincoln Financial said its variable annuity sales increased to $1.53 billion in the latest quarter, up 1% from the total for the third quarter of 2016.

That's the first time VA sales have increased at Lincoln, year over year, since 2014.

So, why are variable annuities looking a little better, at least to some executives at some companies, as some other formerly beloved insurance products still look about as lovely as crabgrass?

Here's a look at five possible reasons.

Sun (Image: iStock)

(Image: iStock)


1. Insurers know more about how to manage variable annuity risk.

Most publicly traded life insurers hold quarterly conference calls with securities analysts to go over their earnings reports.

Company executives now give increasingly detailed descriptions of how they know how much capital they will need to guarantee that annuities will meet benefits obligations under 95%, or, in some cases, under 97% of anticipated scenarios.

Executives at Brighthouse Financial Inc., for example, talked about needing to increase variable annuity assets by $700 million to meet actuarial targets. Securities analysts seemed to like the fact that Brighthouse executives could explain the assumptions behind the increase.


2. Insurers can take steps to buy out holders of old variable annuities with overly rich guarantees without much fuss.

When executives from the big long-term care insurers talk about efforts to reduce exposure to LTCI guarantee risk, they describe long, painful campaigns to win state approvals for premium increases, and long waits to see whether some policyholders will react to increases by giving up on the policies.

VA issuers just send buy-out offers to the VA contract holders and report the number of holders who gave up their contracts to securities analysts a few months later.


3. Insurers have figured out how to design and sell VA contracts without difficult-to-support benefits guarantees.

Dennis Glass, Lincoln's president, noted that his company's VA sales increased partly because of a 23% increase in sales of VA contracts with no living benefits.

"The value propositions for tax deferral and legacy planning continue to resonate with consumers," Glass said during his company's earnings call.


4. Stock prices are high.

Even when an insurer's current VA sales are low, or non-existent, high stock prices can increase the value of the assets parked in the contract holders' separate accounts and increase revenue from asset-based fees.


5. Most issuers are still being safety-conscious.

One securities analyst asked Glass about the possibility of a new VA feature "arms race" breaking out.

"My answer on that is 'no,'" Glass said. "I don't see us, the industry, getting back into an arms race. I think it's a reasonable market in terms of pricing right now."

—Read New Variable Annuity From Lincoln Targets Fee-Based Advisors on ThinkAdvisor.


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