Variable annuities have been selling like air conditioners in January. The market is down, returns are down, and there’s precious little to attract buyers these days. Statistics from the National Association for Variable Annuities (NAVA) show that total premium flows (the sum of new sales [all first-time buyers of a contract, including inter- and intra-company exchanges] and recurring premiums from existing contract owners) for 2001 were down 17.8% from 2000. According to Harold Drescher from the insurance trade group LIMRA Intl., sales for both fixed and variable annuities as a whole fell 3% in 2001; sales for VAs alone fell 18% over the same period. By contrast, sales of fixed annuities rose 36% during 2001.
With such a dismal outlook, is there any hope on the horizon? Are there good things to be said about VAs? Well, yes, actually, there is some cheer to be had–along with a caveat or two.
According to Eric Sondergeld of LIMRA, after nearly six years of consecutive increases in sales, sales of VAs began to decline in the first quarter of 2001. Sales were down 21% in the first quarter (from first quarter 2000 sales), 20% in the second, 19% in the third, and 9% in the fourth quarter. Sales were down only 2% in the first quarter of this year. But Sondergeld points out that most VAs these days have fixed accounts in addition to the variable accounts, and sales of the fixed accounts declined only 4% in each of the first two quarters last year. Third quarter fixed account sales were up 9%, fourth quarter sales were up 38%, and first quarter of 2002 sales were up 34%.
The fixed portion, of course, is not what makes a VA variable, and with market troubles driving sales down, enhanced creativity is called for on the part of marketing specialists, who endeavor to find ways to make an apparently unattractive product appealing, or enhance the waning popularity of something that has seen demand peak. The VA market is no different, and products with new variations have emerged. Some of those changes are beneficial for the salesperson, some for the client; it pays to be wary when deciding which feature offers the greatest rewards.
Says Stephan Cassaday of Cassaday & Co., an investment advisory and planning firm in McLean, Virginia, “It’s disconcerting to me that a lot of the features we’re seeing marketed now are commission-oriented–higher commissions with larger trails–because that comes right out of the client’s hide. It’s in everybody’s best interests for everyone to make money, but the client’s interests have to come first. Some of these products, because of the new commission structures that I think are too inflated, well, right out of the box the client’s got to make 3% to be even and I think that’s too much.” He points out that in many products, fees and costs are hidden, so that the client is never quite sure what the cost will be.
High M&E (mortality and expense) charges, he says, sound an alarm. “A lot of reps out there don’t care about that,” he says. “They would rather show a client a product that will be really hard for the client to make money on, but if they [the reps] make a whopping amount of money, that’s all they care about. That will come back to haunt them,” he warns. A simple 1% difference in investment returns for a retiring client, he says, can make the difference between the client “dying with a million-dollar estate or running out of money in his 80s.”
There are some changes the industry is implementing that are good for the client, however. American Life of New York is heading in the right direction, with a product available online that carries no other expenses than the fees of the funds within the annuity. There are no commissions for selling the annuity; it’s designed for fee-only planners to offer to their clients and is available on ALNY’s Web site (www.americanlifeny.com). Average fund fees, according to Mary Kaczmarek of ALNY, are around 100 basis points.
TIAA-CREF’s variable annuity, which became available to the general public about three years ago, has seen considerable growth, according to Assistant Product Manager George Spindell. There is a fixed component within the VA, says Spindell, that offers a return of 4.85%–a rate that looks very attractive in today’s market. Coupled with the low cost of TIAA-CREF’s products (the stock index portfolio, says Spindell, carries a charge of 37 bps versus ALNY’s average 100 bps charge), the VA has “no front-end sales charge, no back-end charge, no per-account charge, no commission.” This, says Spindell, “coupled with the flexibility built into the annuity, has enabled us to experience a boom where others have not.”