A,B,C, and L-Shares: VAs Respond To Competition

Variable annuity gross sales have seen some rocky times of late, slipping 16% to $114 billion in 2001 from an all-time high of $137 billion in 2000.

VA sales through the 2nd quarter 2002 have stabilized somewhat compared to last year, reaching just over $57 billion. Volatility and the sustained market downturn have contributed most to declining sales.

Partly in response, but also in an effort to keep afloat in the competitive variable market, many VA manufacturers have continued to broaden their portfolio, targeting various types of distributors and consumers. Theyve also begun to offer new or revamped guarantees.

Well look at some of these changes here. The companies offering the newer designs are clearly trying to position their products to compete in todays more difficult equity marketplace.

The typical six-year to eight-year back-end load, heaped commission scale variable annuity–often referred to as the B-share VA–has long been the staple of the industry. Even today, the B-share VA remains the predominant product for many career agent companies.

But as VA sales through independent investment-oriented producers have continued to increase, manufacturers have experimented with alternate product structures. These structures vary in whether and to what extent they charge back-end loads, and in the level compensation they pay to the sales representative.

For instance, some companies have started introducing A-share, C-share and L-share variable annuity products. The table summarizes the back-end load and compensation structures for these various product forms. The products borrow their “share” names and design from mutual funds.

As you can see, the A-share products typically have a front load instead of a back load and they have a compensation structure similar to that of traditional B-share products. C-share VAs have no back-end loads, but they offer levelized comp schedules. The L-share VAs have fairly short back-end loads and smaller heaped commissions plus a significant trailer.

For product asset charges on the various product forms, companies appear to take one of two approaches:

1) Charge the same level of asset-based charges among all product types, and differentiate the various forms with higher minimum sizes and/or stripped-down product features.

2) Charge higher asset-based charges with increasing liquidity. These charges perhaps might go as much as 30 basis points higher than those in a B-share VA product.

The second approach appears to be the most prevalent. However, this approach can lead to fairly high fees when the customer elects to include other menu add-ons, such as guaranteed minimum death benefits or other guaranteed living benefits.

Based on new product introductions that have been coming out recently, the L-share variable annuity appears to be the most popular of the new alternate product structures.

L-shares may appeal to consumers who want to switch to a new VA to get access to its additional fund choices or newer product features but who do not wish to restart another 7-year surrender charge.

C-shares are the next most popular.

A-shares are offered by only a limited number of manufacturers.

Most VA manufacturers seem to believe that offering increased liquidity will not be detrimental to persistency–even after the surrender charge–because of the significant trailer commissions that this approach allows. But since these products are so new, no experience is available.

Most C-share and L-share VAs are filed as stand-alone products with separate product prospectuses. However, a few companies have taken the popular menu approach to product design one step further: They offer all load structures under a single prospectus. This approach may alleviate suitability concerns, since the consumer is presented with the full range of product offerings and so is better able to make an informed choice.

As VA sales declined over the last two years, fixed annuity sales have picked up. In response, some annuity manufacturers and distributors tout a split investment–partial investment in a fixed annuity for principal protection and guaranteed returns and partial investment in a variable annuity for upside market potential and a hedge against inflation.

Others have focused on developing or refining guarantees for their VAs. In particular, the market has seen a proliferation of new or enhanced guaranteed minimum withdrawal benefits (GMWBs) and guaranteed minimum accumulation benefits (GMABs). These fall into the category of “guaranteed living benefits.”

GMAB guarantee a return of principal (or some multiple thereof) at some point in the future. They were introduced by a handful of companies several years ago but never gained significant popularity, likely due to the high fees that often accompanied them as a result of the risk they present the insurer. Lately, however, there has been a resurgence of interest in these benefits.

Several new GMABs have been introduced in recent times. Some offer liberalized guarantees. Their higher fees do not appear to be a deterrent to marketers or buyers, perhaps because of the current market environment and interest in guarantees.

Several mutual fund manufacturers have followed suit by offering principal protection guarantees on various mutual funds.

GMWB benefits guarantee a minimum level of future withdrawals. These features have also gained in popularity and been enhanced in recent times. Some gave increased the maximum annual withdrawal from 7% to as much as 12%.

In step with these enhancements, companies are also revisiting the costs (pushing charges upward in some cases) as well as the riskiness of their VA guarantees, particularly since there is currently a scarcity of reinsurance for these features.

Going forward, expect variable annuity product manufacturers to continue to refine their product offerings and to monitor persistency on the new product forms. Already, the market is seeing additional features and increasing commissions on C- and L-share products.

For manufacturers offering or liberalizing guarantees, it will be important to balance the risks of these benefits with the potential rewards of additional sales and increased persistency. Sound risk management will be key to being successful long term.

For distributors, it will be even more important to keep abreast of new product offerings and guarantees, with an eye toward understanding where they can best fit consumer needs.

Nancy M. Kenneally, FSA, MAAA, is a senior consultant with Tillinghast-Towers Perrins financial services practice in New York. Her e-mail address is nancy.kenneally @tillinghast.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 7, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.