Against the Tide

You already know the state of the markets. You know, too, how clients feel watching assets dwindle. Industry experts tell you that a down market is the best time to acquire new clients and new assets under management, but you know this may not be the best time for every investment vehicle.

Take variable annuities, for example. The VA industry has had it tough. The National Association for Variable Annuities (NAVA) reports net premium flows for VAs down 18.8% in the second quarter compared to 2Q in 2001; they also declined from 1Q 2002. Deborah Tucker, VP of communications at NAVA, points out that while the amount in equities as an investment objective component of VAs at the end of 2001 was 58.5% and dropped to 54.5% at the end of June, the amount in fixed accounts, bonds, and money market subaccounts all rose (see table on page 89). This seems to indicate, says Tucker, that rather than change their allocations in existing contracts, people are buying new products.

Everything Old Is New Again

The trend is definitely toward security and guarantees. Tucker mentions it, as does Laurie Lewis, chief counsel, federal taxes, at the American Council of Life Insurers (ACLI), a trade organization. It’s not so much a trend, says Lewis, as an appreciation of features often there all along; ignored in the bull market, they’ve taken on a higher profile. Increased interest in VAs with fixed-rate funds is up, says Lewis. Fixed-rate funds guarantee a certain percentage of return, and a fixed sum of money every month.

Other familiar features are death benefits and minimum income guarantees. “When there’s no down market,” says Lewis, “people don’t pay any attention.” When the market fluctuates, it’s different. Most annuities, she points out, guaranteed your heirs at least a return of premium if you died before taking payments; other annuities might return premiums plus 1% to 2% a year. “When [variable] annuities were returning 15% or 20% a year,” she adds, no one noticed. They also ignored minimum income benefits. “This is a pessimistic industry,” says Lewis, reminding us that in constructing its products, the insurance industry considers the Biblical “seven fat years and the seven lean years.”

A Sure Thing

With this concentration on hard-times provisions, companies are reacting to consumer interest in security, on everyone’s mind in these very insecure days. One way, says NAVA’s Tucker, is to shift the focus of annuities as growth or accumulation vehicles to annuities as guaranteed retirement income.

Being able to annuitize “and not outlive your assets” is popular, says Tucker. Since “most people figure they will never be able to retire” due to market erosion of their assets, she adds, investors will value annuities that enable them to “cover fixed obligations” such as a mortgage or utility bills. Another feature in product development that consumers find important, she says, is the ability to liquidate. Investors want the ability to take money out of their VAs; some riders being added to contracts include that right.

Among new products and options in the VA market are Lincoln Financial Group’s Income4Life Solution, The Hartford’s Principal First, and American Skandia’s Guaranteed Maturity Annuity. Each allows withdrawal of principal in one form or another, catering to people’s fear of tying up their money for long periods of time or even indefinitely.

The irony is that consumers are also preoccupied about guaranteeing an income stream amount, even though few people ever convert their annuities into an income stream. In fact, according to Lorry J. Stensrud, CEO of Lincoln Retirement and executive VP of Lincoln National Life Insurance Company, only 1% of annuity holders currently annuitize. If holders keep control of their assets, they feel better, Stensrud says, and that is what Income4Life offers by allowing them to withdraw money–even after annuitization. The monthly payout will drop, of course, but having the option is popular, Stensrud claims. Despite being “launched in one of the worst equity markets we’ve ever had,” notes Stensrud, the product was well received–perhaps more in anticipation than in actual purchase, since he says, “for every dollar [of the Income4Life Solution] we sell, we probably sell three or four dollars [of annuities] where [advisors] say, ‘I like the feature [Income4Life] but don’t need it now and may need it in a few years.’”

The Hartford’s product offers a guarantee that investors “will never get back less than the amount they invested” in a VA contract as long as withdrawals in any year are limited to 7% of the total amount invested. Ryan Johnson, VP of sales and marketing at The Hartford, points out that in the last few years there’s been new interest in “living benefits” that allow annuity holders to lock in returns or guarantee a minimum income. The Hartford, he says, “did not participate . . . until the last couple of years. We did not feel comfortable with the way a lot of those provisions were structured, and took a completely different look” at changing its VA products. The result was Principal First, a “guaranteed minimum account benefit through structured withdrawal.” Principal First, in addition to limiting withdrawal to 7%, also allows a lock-in of gains in a good market. (There may, of course, be an additional charge for this latter benefit, says the literature.)